 In this discussion, we will discuss the discussion question of what is a bank reconciliation and its purpose? So what is a bank reconciliation? It's gonna be one of the major internal controls that we will have and this is huge when we're using an automated system because it's really only secondary to the double entry accounting system itself and if you're using an automated system then it really will force you something like computer software accounting software like QuickBooks or Something like that it will typically force you to be in balance check balance But we also want to so that's going to be one huge internal control that's being the double entry accounting system is one of our big checks Against making errors So that's going to be a huge help the next thing we want to do and the thing that really could take most Many small businesses to the next level and is a requirement of large businesses would be to do the bank reconciliation and The reason for that is that the bank reconciliation is going to really tie out our information to a separate Third-party source who is very reliable that being the bank so we can tie out all of our cash transactions to the bank and Because cash is involved in pretty much every cycle within our system We're not just auditing cash then and note that that's a huge key to understand because When we think of a bank reconciliation, we might think well cash is so important and we have to reconcile cash That's true, but as we reconcile cash We're also reconciling at least a component of every other system that deals with cash Which is pretty much every system in the accounting process So it doesn't test timing all the time in total accuracy and timing But it does give some controls and testing over The accounts receivable cycle the sales cycle the accounts payable cycle the payroll cycle. So it's a huge component That we want to put in place So the bank reconciliation process the way we will do this is typically the bank will issue a bank Statement monthly and that's going to be a good way to do this as we have online systems We know we can check the balance any time now But it's typically good to have a monthly system because what we need is a beginning balance Defined beginning balance and a defined ending balance that we can tie out to the bank statement and to our books and see What is the same and what is different and that's literally all we are doing we're trying to say if we did everything properly in our books and Deposit everything in the bank and we wrote checks for everything from the bank Then our information should completely line up perfectly in a perfect world But it's not a perfect world and it won't line up perfectly and we'll have to figure out what exactly those differences are By finding those differences, then we can really verify everything else that is in the system So the bank statement for example if we have the month of November and we wanted to reconcile the month of November We would have the bank statement listing the deposits and the checks for the month of November Listing the beginning balance has of the beginning of the month and the ending balance We're gonna compare that to our books where we're gonna have the beginning balance for November and the ending balance if we concentrate first on The ending balance the November 30th balance for the bank and the books You would think it would be the same again in a perfect world But almost never will it be the same because not necessarily because of errors even if everything was perfect Because of timing differences and that's really what we want to get the bank Regulation down to timing differences those having to do with outstanding checks and outstanding deposits Outstanding checks being items that we wrote as of the end of the time period which have not yet cleared the bank The bank doesn't know about them yet So therefore they're gonna have to be something that we are gonna have to adjust for to get from the bank balance to our balance We're also gonna have the outstanding deposits where we made a deposit We know that deposit was made, but it hasn't cleared the bank yet and therefore we're gonna have to add that to the bank balance side that's really gonna be the essence of the of the bank reconciliation once we're completed with it and Once we can reconcile the bank balance as of November 30th to our balance as of the end of the month Then we can be pretty certain that everything we have in our system is correct and verified by the third party So the bank statement although the reconciliation will help us to to find errors on the bank side That's really not the purpose of it the purpose of it meant one, you know, that's one purpose of it, but the main purpose of it is to Reconcile our side really to make sure that our books are Correct by double checking the third party source, which is typically very accurate about about what the transactions are Now then there's gonna be the other side of the bank reconciliation process where We find things on the bank statement that we haven't recorded yet. For example, if there's outstanding If we make if we bought checks or something like that if we had service charges from the bank We wouldn't have recorded that we wouldn't have known about them until we got the bank statement So in the process of the bank reconciliation We will have to adjust our books for that and at the end of the day We're gonna have to make a journal entry basically saying um We owe we had to reduce our balance with a journal entry reducing cash with a credit Debuting something like service charges for the fees that the bank has has put in place for us And anything else that's on the bank statement. There's a deposit We didn't know about possibly from a CD or an investment that came due that's now in our bank statement We'll have to adjust that somehow. We're gonna have to debit the bank account, which would be nice But then we'll have to credit something else, which is probably going to be Something like our investment an asset that became due it's gonna have to go down If there's if there's an error in the checks that happened if the bank says we supposed to write a check for so much And we wrote it for a different amount. We'll have to make the adjustment related to that information as well So that's gonna be the bank reconciliation process again. Summary ended up It's gonna be one of our huge internal controls will have over cash But also an internal control affecting a lot of the other components and cycles within the system and we're going to be comparing the bank balance to the book balance