 Hello and welcome to this session in which you would look at a bank reconciliation problem but before we look at the problem I would like to remind you about the bank reconciliation roles. How do we prepare a bank reconciliation and what is the purpose of a bank reconciliation? Well there are what we call timing differences between your bank balance and your book general ledger. So you have a general ledger at your company and you have your bank balance at the bank and specifically for the general ledger we're discussing the cash general ledger and the cash general ledger and the bank balance should equal to each other. In other words what you record on your account balance at the company as far as cash is concerned should equal to your bank account. That is true except that we have what we call timing differences between your cash balance and your bank balance and because of those timing differences the company will need to account for those timing differences and reconcile them. What are those timing differences? One is something called deposit and transit. Again this is a review of the rules I did discuss bank reconciliation but I'm going to go over those rules very quickly. What is a deposit and transit? A deposit and transit is when the business deposit an amount at their bank but that amount for that particular month is not showing on their monthly bank statement. Why? Because they deposited this amount maybe late during the month and it's not showing for example you deposited something December 31st it's not going to show until January maybe first or second on your bank statement. Therefore you need to account for the deposit and transit. Therefore when you get your bank statement for the month of December you will add to it any deposit and transit any deposit that you actually deposited in the bank but it's not showing. Also you will deduct any outstanding checks. What are outstanding checks? You deduct outstanding checks from your bank balance. Outstanding checks are checks that you wrote. You wrote the checks you send it to your suppliers you send it to your vendor but when you looked at your cash when you look at your when you look at your bank statement those checks were not cleared. In other words the supplier the vendor did not deposit them under bank account and if they did deposit them they did not reach your bank account as of yet. Therefore you will need to deduct them from your bank statement because the bank is not aware of it and the third type of adjustment you might have to do on your bank statement is to look for any errors errors that the bank committed whether they added money to your account or they deducted money on your account an error and this is those are typically the three adjustments you will make on your bank side. Now in the in the example I'm going to be working I'm going to make this is this example a little bit more challenging a little bit more tricky but you will see how when I look at the figures on your book balance on your book balance what you do is you start with your general ledger cash account whatever that amount is then you will add any interest the bank gave you for that particular month you will add any collection that the bank collected on your behalf if a customer send the payment directly to the bank account and you are not aware of it now you are aware of it you will add it you will deduct from your book balance any bank fees that you were not aware of during the month and any non-sufficient checks non-sufficient checks are checks you thought they were good checks when you receive the check you debited cash you credited account receivable for 500 dollars then you find out that 500 dollar was no good because after you deposited the check the bank told you that check is no good because the customer don't have money in their bank account then you have you might have to deduct or add any bank errors now in this example I don't discuss any bank errors to keep it simple because there's a purpose for this example but on another lessons I do have examples with bank errors at the end of the day your cash at the bank account should equal to your cash balance at your book book balance so simply put your bank balance and your book balance should equal to each other's now the best way to illustrate this concept is to take a look at an example what is a special about this example what is tricky about this example well here's what's going to happen in this example I'm going to tell you the tricky part of it but that's not the only tricky thing you can see on the CPA exam or in your intermediate accounting course nevertheless I have to warn you in a sense that there are other complications for example I don't discuss any errors here whether it's a bank error or a book error but I do discuss them and other examples so here's what we have here we have the June 30th bank reconciliation which is the prior month then I gave you the month of July information so when you prepare your bank reconciliation you're going to have to take into account the June 30th the prior bank reconciliation and I will show you how how will you have to deal with this type of situation if you are giving this type of scenario an intermediate accounting or on the CPA exam however before we proceed I would like to remind you whether you are a student or a CPA candidate most likely that's what you are if you are listening to this lecture I don't replace your CPA review course I don't replace your accounting course what I add is I'm a useful addition to your CPA review course I'm a useful addition to your accounting course I can help you do better on your exam I can help you do better in your accounting courses by providing new lectures resources multiple choice questions true false exercises this is a partial list of all my accounting courses my CPA review courses are aligned with your Becker Roger Wiley Gleam or any other CPA review course you are taking I also give you access to 1500 previously released AI CPA questions with detailed solution if you have not connected with me on LinkedIn please do so take a look at my LinkedIn recommendation like this recording share it with other connect with me on Instagram Facebook Twitter and Reddit and recently I started a group me account for CPA exam support group please join us if you're studying for your CPA exam to discuss your exam preparation with me as well as other CPA candidates so first let's take a look at this example to see what we are giving we are giving the bank record as of July 31st the bank statement is showing we have eight thousand three hundred and fifty dollars we are giving the general ledger cash balance as of July 31st per hour books nine thousand two hundred and fifty this is what we are giving also we are giving the July 30th which is the adjusted bank balance the adjusted book balance and deposit and transit and outstanding checks and this is again for the prior month now we are giving also July deposit five thousand dollar per the bank statement this is what the bank statement is showing per books it's showing five thousand eight hundred and ten so the first thing I'm gonna do I'm gonna adjust my bank balance so my bank balance and don't worry I'm gonna be don't worry about how things are presented I will show you the solution on the next slide properly written out but basically you will start with your bank balance and your bank balance is showing as of July 31st eight thousand three hundred and fifty eight thousand three hundred and fifty now here's what your July deposits are showing if you look at your bank account it shows that you have five thousand of deposit if you look at your books it shows that you deposited five thousand five hundred and ten dollars at face value it look as if you have deposit and transit of eight hundred and ten what does it mean eight hundred and ten it means your bank is showing five thousand dollar but you your your book is showing five thousand eight hundred and ten well at face value indeed eight hundred and ten but you have to be very careful if the prior month is giving and this is the trick here's what they're telling you they're telling you from the prior month you have deposit and transit of one thousand and forty dollars what does that mean it means in this five thousand dollar bank deposit you have to back out the one thousand and forty dollars that you deposited in July because this was this this one thousand and forty belongs to July but it was not showing now it's showing dear I'm sorry it belongs to June not July this one thousand and forty you deposited in June but it's not showing to July therefore for when you prepare your bank deposit in July you have to back out this one thousand forty of June therefore your true June deposit if you back it out it's three thousand nine hundred and sixty this is your true June deposit well but your books are showing that you deposited five thousand eight hundred and ten therefore the difference between them is your deposit and transit which is one thousand eight hundred and fifty therefore we add deposit and transit one thousand eight hundred and fifty for the month of for the month of July once again at face value it looks like you are missing eight hundred and ten dollars but that's not true why because really the July deposit included one thousand and forty from June you have to back it out and this is what I did here so your true bank deposits were three thousand nine hundred and sixty but on the books it shows you deposited five thousand eight hundred and ten therefore deposit and transit one thousand eight hundred and fifty make sure this is this is one of the tricks here the second thing is outst July checks per bank it shows that you cleared four thousand dollars of checks but on your books it shows for July you only wrote three thousand one hundred hold on a second at face value it looks like someone is writing checks for your company and not recording those checks those checks on the books is that true well at face value it looks like this but if we examine the prior monthly bank reconciliation if you are giving that prior monthly bank reconciliation it shows that you have one thousand five hundred from the prior month from from June you have to assume that those were cleared in July therefore if we take four thousand dollar of checks back out the June checks well it means the bank cleared two thousand five hundred of the checks that you have written however on your books it shows you wrote three thousand one hundred checks well now we know we have six hundred of outstanding checks what do we do with outstanding checks we deduct outstanding checks once again don't worry about my handwriting you will see it clearly on the next slide now on the bank side the bank adjusted side is nine thousand six hundred I'm going to tell you there are no errors in this problem because the purpose is not to make you deal with errors just to kind of help you understand this concept so now we're going to go from the bank side to the book side and on the book side we saw that our beginning balance is nine thousand nine thousand two hundred and fifty now what we do is we go through the bank reconciliation that deals with the book balance well it shows that the bank deposited seven hundred dollar on our behalf well we're going to add notes receivable seven hundred dollars our bank shows that we have twenty five dollars of bank service charge well service fee negative twenty five now bear in mind for every adjustment we made we make on the books we have to prepare an adjusting entry and the adjusting entry would always involve either a debit or a credit to cash for example for the seven hundred dollars we debit cash seven hundred we create the note receivable for that client seven hundred dollars the service fee we're going to debit service fee expense twenty five we're going to credit cash twenty five that's the journal entry then there was a July non-sufficient check return from a client three hundred and twenty five dollars what does that mean it means a client sent us a check and in good faith when we receive that check we debited cash on our books three twenty five and we credited the account receivable for that client three twenty three twenty three twenty five now the bank tell us that check is no good well what do we have to do with non-sufficient checks we are going to deduct three twenty five we're going we're going to deduct three twenty five and the entry is to to fix this error we're going to debit account receivable three twenty five we're going to credit cash three twenty five simply put we will reverse this entry now if my math is right when i when i go through all of this computation it shows that my book balance is nine thousand six hundred notice my bank balance is nine thousand six hundred my book balance nine thousand six hundred simply put everything that's on the bank statement was added to my books and everything that was missing from my bank statement was added such as deposit and transit and outstanding checks added to the bank side once those two reconciled simply put it means i accounted for everything whether it's on my books i made sure it's on my bank statement and if it's not if it's on my bank statements and not on my books i add it to my books and after all said and done the adjusted bank balance should equal to each other and this is what it looks like notice i have my this is my beginning book balance plus deposit and transit minus outstanding checks this is my adjusted bank balance my my balance per books started at this much i added the denotes receivable i deducted the bank service charge i deducted my non-sufficient check and this is my bank my book balance and it should equal to my bank balance and this is the journal entry all in one shot so i debited cash 700 credited the counter receivable 700 then i debited office expense service charge 25 credited cash 25 this is a combined entry just in case in case you are not comfortable with this go back to what i did when i broke them each one by a separate journal entry but this is it's all combined it's called a compound entry what should you do now go to my website farhatlectures.com don't shortchange yourself and do what practice multiple choice questions true faults exercises don't shortchange yourself invest in your accounting invest in your cpa preparation invest in your professional certification it's going to pay dividend for years good luck study hard and of course stay safe