 Hello and welcome to the session in which we would look at a bank reconciliation that could appear on the CPA exam or in your accounting courses. If you want to succeed on the CPA exam, bank reconciliation is a critical component. It appears on the exam again and again in either form of multiple choice or in form of simulation. This simulation that I'm going to be working with you today, I would consider this a tough, a hard simulation. In other words, if you can finish this simulation, then you should be good to go as far as bank reconciliation and I will try to do so. Now, before I start, I would like to remind you that if you are a CPA candidate or an accounting students, you should check out my website, farhatlectures.com. If you are a CPA candidate, I don't replace your Becker, your Roger, your Glimmer, I don't do that. I can't do that. What I can do, I can be a useful addition. I can supplement those courses so you are more comfortable and you can add 10 to 15 points on your CPA exam. And here's my challenge to you. Here's what I'm offering you and here's the risk that you are taking. I'm telling you, I can improve your grade and push you above 75% grade for my monthly subscription. Now, are you willing to take that chance? That's the question. If you don't like it, you can cancel, not a big deal. But are you willing to try it out to see if it's going to help you improve your knowledge, which in turn improve your preparation, which in turn improve your grade? And not for anything, check out my website to see how well is your university doing on the CPA exam. I do have this data. If you're an accounting student, I have many accounting courses that I can complement and supplement your courses. Please connect with me on LinkedIn and check out my LinkedIn recommendation. Check out what people said about my services when they use my services and my lectures. If you like this lecture, please like it and share it. If it helps you, it means it might help other people connect with me on Instagram and Facebook. Let's dive into the CPA simulation. Like these are all exhibits. So this will be an exhibit. This will be an exhibit. This will be an exhibit. So you're dealing with three different exhibits here. West Goshen Company maintained a check and account at Wells Fargo Bank. Fair enough, bank statements are prepared at the end of each month, which they should. The November 30 reconciliation of the bank is as follows. So this is the November 30 reconciliation. So they're giving you already a completed reconciliation. Now, if they do this on the exam, this is easy for you. Why? Because this is going to kind of remind you what does a reconciliation looks like. So here they're showing you the account per bank balance, less outstanding checks, add deposit outstanding or deposit and transit deduct less outstanding checks gives us the adjusted bank balance as of November 30. So they're giving you kind of a half a solution and they will give you that because you will need this information for December bank reconciliation, which we're going to be preparing December. The company general ledger check and account showed the following. Now, this is the general ledger. Now, they might give you a more detailed a general ledger because here what they're giving you is the total receipts and the total disbursements. Maybe on the general ledger of the exam, they could give you the check numbers, but all the check numbers, they should add up to 42,153 and all the deposits, they should add up to 42,950. So this is the general ledger. So first you want to make sure you understand what you have. So the balance as of December 31 on your books is 4,440 how much cash you have as per your general ledger. The December bank statement. Now this is the bank statement. So notice they're starting with 32 61 the bank statement is showing this balance because remember the bank statement ended up with 32 61. Then they have a deposits of 43,300. They process checks of 42,215. They deducted $25 as a service charge and there was a non-sufficient fund checks for 470 per your bank statement. You have cash 3,848. Now the question is how much cash do we have? This is what the bank reconciliation is for. We want to make sure those two numbers equal to each other. After we account for the reconciliation. So here you are giving three exhibit November reconciliation, your general ledger for December and your bank statement for December. Let's look at additional information. Again, I would say this is a tough simulation, right? The checks were processed by the bank include all the outstanding checks at the end of the November except check number 365. So the first statement is telling us the following. All these checks, those were the outstanding checks. They were all clear except check number 365, which is for $204. Let me put it up here. There's $204 that's still outstanding. In addition, there are some December checks that had not been processed by the bank by the end of the month. And they're telling us there are outstanding checks, but they're not telling us what they are. Also, you discovered that check number 411 for $650 was correctly recorded by the bank, but was incorrectly recorded on the books as 560. Let's figure out what do we need to do with this check. Let's go back to check number 411. Check number 411. Well, it's not shown here, but let me tell you what happened. When you wrote the check, when you wrote the check, you actually wrote the check. This is this is the check and you wrote the check for $650. So this is the actual check. You know, this is the name of the person that you pay to the date. All of everything is correct and you wrote it for $650. Now, what was that check for? Advertising expense. So here's what you did on your books. You debited advertising expense. 560 credited cash. 560. So who made the error? First, you have to figure out who made the error. That's the first thing because you have to find out who made the error. Well, the check cleared for $650. The check is for $650. However, you recorded it as $560. So who made the error? The company made the error. How much is the error? The error is $90. What does that mean? It means your cash disbursement is understated by $90 because you wrote the check for $650 and you said you paid $560. Right? So simply put, in other words, if we go to your GL here, you said disbursements of $42, $153. We have to add to this disbursement negative $90 because your disbursements are understated by $90. So this is what this information gave us. It just showed you the check as well as the journal entry so you can visually see what happened. So kind of we took care of this. Included in the bank deposits is a $1600 deposit incorrectly credited to our bank account. That's excellent. What should we do? We shouldn't do anything, right? Now, but basically the point is the bank made an error. Now this is a bank error. Bank error. The bank gave us an additional $1600. It was for someone else and they gave it to us. Now it could be the name of our companies are similar. It could be the account are similar. I audited credit union and those mistakes happen. Those mistakes happen. The person punching the wrong number because they were very close to each other and they gave the credit to the other, to the other, to our company. Now here's what I need to tell you. This is the importance of a bank reconciliation. You know, if you really want to be an ethical, which you should not, but I'm trying to show you the importance of a bank reconciliation. If you don't say anything about the 1600 and the other party and other words, if they gave you 1600 of cash, it means they took that money from another account because the other account was not properly credited. Your account was credited credited in the banking language means they gave you the money. Now if the other company don't prepare a bank reconciliation, they may not discover that their account is understated. So that's the importance of the bank reconciliation. So if somebody wants to be an ethical, they wouldn't say anything and they would wait until the bank contact them and tell them, look, there was a deposit that wasn't really yours. We need to take the money out. But if you don't say anything and the other company don't prepare a bank reconciliation, basically they lost 1600, which is you should not do that. But the point I'm trying to make is the importance of a bank reconciliation. Okay, so there was a bank error. Simply put, how do I translate this? It means the bank balance here, it's showing the bank balance of 3261. We should deduct 1600 from it. We'll get to all of this. But this is what this error means. The deposit should have been posted to the credit of Lowe's Garros Company. That's fine. We don't care, but it's not our company. The non-sufficient checks has not been redeposited in the company and will seek payment by the customers involved. And here there was a non-sufficient checks of $470. What is a non-sufficient check? Simply put, somebody paid you $470. When you receive the check, you debit that cash, $470. You credited your account receivable $470 under the impression that this check is good. You don't know whether this check is good or not. Now you took this money, you deposited this money in the bank, you deposited this check, then the bank is telling you that bank is no good. So what do you need to do? You need to debit a account receivable $470 credit cash. You need to take out that money and we'll look at that later on. This will be a book adjustment. Also on the bank statement, there was a $25 service charge. So this is, I gave you an overview. Now we're going to start to prepare, we're going to start to prepare the bank reconciliation. On the exam day, what you should do, what you should do, in my opinion, if you're giving a bank reconciliation, depending on how easy it is, if they're giving you a prior month bank reconciliation, showing you a prior month bank reconciliation, which is they're showing you November, if that's the case, I will start with my book adjustment. I think the book adjustments are easier in this problem. So start with the side that you think it's easier for you. Why? Because once you start with that side and you find the answer, then if you're confident that's the answer, at least you can plug in that answer in your bank side. So you'll get some points. In my opinion, the book side is easier for this, for this simulation, but I will start with the bank side. It doesn't really matter. So how do you start your bank reconciliation? I'm going to start with the bank side. Well, I'm going to start by, what's my balance per my bank? What is the balance per my bank? Now, remember, the balance per bank is given to us. So we'll start with the balance per bank, which is 3,840. Here's the bank statement and this number is given to you. So now you get some point. So how is the bank adjusted? Always on the bank reconciliation, you're going to have to add deposit and transit and deduct what I called outstanding checks. Now, the bank reconciliation, I have it much, much more covered in details on farhatlectures.com, but I just want to, you know, like, this is what should go there unless you have some errors, which we do have some errors in this example. So let's see. So we need to add deposit and transit. Now, what are deposit and transit? Deposits and transit are deposits that we made at the bank, we made, but it's not showing in the bank account. Now, how do I know what's my deposit and transit? I compare. How much did I deposit? I deposited 42,950 and the bank is showing 43,300. Well, hold on a second, that does not make any sense at all. How is that possible, right? If I deposited 42,950 and the bank's showing me, you deposited actually more 43,300. Well, that's really good news, but that's not true. So this is your initial, this is your big, the big idea. Now you have to dig into this. Well, remember, so what's the difference between those two? What the difference is, the bank is showing you, you have $350 more, which is not, that's not really true. Okay, that's the difference initially. Why that difference exists? Remember, the bank gave you $1,600 deposit. Then you have to deduct this. So you have to deduct $1,600 from that deposit. Remember, they gave you money, that's not really yours. That's fine. Also, you have to take out, remember this, you have to take out also any deposits and transit from the prior month. Hold on a second, why am I doing this? Why am I taking out my deposit and transit? Because my deposit and transit last month, I accounted for them. So I have to do, I have to go back to my prior month bank statement and I have deposit and transit of $1,230. So I have to take out $1,230 as deposit and transit. Why? Because this deposit belongs to, as far as I'm concerned, those $1,230, I'm aware of them. They belong to November, they don't belong to December. The bank is showing them in December, but there's in this number here, $1,230, that belongs to November, not December. Well, basically once I account this, I notice that I have deposit and transit. The difference now is $2,480. Simply put, my deposit and transit $2,480. It's simply put after I make the adjustments. I notice that in other words, in other words, here's what I'm doing. Here's what I'm doing. I take $43,300, what the bank is showing, that's what the bank is showing. I'm going to deduct from it $1,600, which is the error. I'm going to deduct from it $1,230. Let me show you what the bank should be showing. Then I will compare it to what I deposited and I will find the missing amount. Let me just pull my calculator here. Give me one second. I'm going to take $43,300 minus $1,600. The bank made as an error minus $1,230. The net deposit is $40,470 minus $42,950. That's the difference between this number and this number is $2,480. It means I still have deposit and transit for this month $2,480. I'm done with deposit and transit. Now remember, after deposit and transit, I have to deduct any outstanding checks or any bank errors. Now I already know about one bank error, which is the $1,600. Let's take it out because that money was not mine. I have to take it out. Now I have to account for what we called outstanding checks. Now let's deduct the outstanding checks. That's the second component. That's the second major component on the bank reconciliation. Well, here's what we are told. We are told that the disbursement as per the general ledger $42,153, the disbursement per the bank statement is $42,218. There's a difference between the two. Now I already know that my GL disbursements is incorrect. I need to add $90 to it because I made an error. Therefore, let's start with that. So I'm going to start with taking $42,153 plus $90. Why the plus means deduct an additional $90? $42,153 plus $90. So my true disbursements were $42,243. Those are my true disbursement because I needed to add $90. Remember the check for the advertisement. It was incorrectly recorded on my books. I understated my amount by $90. Now the checks were processed for $42,118. That's fine. But we have to remember those checks, some of them included checks from the prior month. Why checks from the prior month? Because in November I had outstanding checks and those outstanding checks cleared now. If they cleared now, that means they don't belong in December, they belong in November. So I have to take out any checks that belong to November. And I'm told that all of them were cleared except check 365. So if I go back to my November statement, this check was not cleared. I'm already told that. And the other one, $126, $159, $89, and $370 were already cleared. So what do I need to do? I need to take these figures and deduct them from my checks processed. So let's do that. I'm going to take $42,218, and I'm going to deduct from it all the amount of the checks. One check was for $126, another check was for $59, another check was for $89, and another check was for $370. Therefore, my checks processed for the month of December was $41,574. Now, this is how much I wrote in checks, $42,243. The bank processed $41,574. The difference between them, let's find the difference $42,243. The difference is $669. But remember, in addition to the $669, I still have the outstanding check, the $204, check number 365 from November. So $669 plus $204, I have outstanding checks of $873. Therefore, I deduct outstanding checks of $873. And simply put, I'm done with the my bank side, because usually the bank side, the bank side will have three things, deposit and transit, outstanding checks, usually. And this is an unusual, if there's an error by the bank, it's unusual. But usually, once you add deposit and transit, deduct outstanding checks, you should find your correct balance unless there's a bank error. And remember, the bank error could be minus or could be positive. Maybe they did not give you the money that belongs to you, right? Now we know the corrected cash balance is $3,855. Immediately, what you should do on the CPA exam, put that corrected balance under the book balance as well, if you are confident. This way you get credit for it. Now we need to prepare the book side of things. What's the book side of things? The book side are things that the bank charged you, the bank charged you, but you are not aware of it. So it's on the bank statement, but it's not in your books. What could be those? Well, we already told the non-sufficient check and the service charge, you're not aware of the service charged. Okay, a non-sufficient check. And you made an error. Remember, you made the error for the $90. So three things go on the book side. Let's start with the book side. Balance per books 4440. Balance per books it's giving 4440. At least put this down so this way you can get credit for it. Remember, three things we have to adjust the books for. And they're all deductions. Sometimes it's an addition. Sometimes, for example, the bank might give you interest, like $5 interest, then it's an addition, but they're all deduction. Error and recording check. We already know this $90. So we need to deduct $90. And for every thing that we do on the books, we need a journal entry, which we'll prepare in a moment. That's the first one. Service charge $25 in non-sufficient checks 470. Now I'll take 4440 net dose and the amount is 3850. Now I'm good. I'm confident that my bank reconciliation is working. Oops, not this one. Now I know my bank reconciliation is working. That's why I told you once you are confident in one number, put it on the other side as well. This way you'll get credit for it. So now my bank reconciliation is reconciling 3855 to 3855. Once again, this bank reconciliation may take you quite a bit of time if it's on the CPA exam. The key is to, at least if you can, you know, try to finish as much as possible, right? And hopefully you can finish the whole thing. We're not done yet. We still have to prepare the journal entries. Remember, anything that you do on the books needs a journal entry. Well, we need a journal entry for the error. $90. We need to debit advertising expense. Remember, I showed you this early on in Credit Cash 490. Miscellaneous expense, which is for the $25 debit miscellaneous expense or bank service charge $25 account receivable. Remember, why account receivable 470? Because remember what I told you when we received the check, we debited account receivable. I'm sorry, we credited account. We debited cash when we received the checks. We debited cash 470, credited receivable 470 for the non-sufficient check. Well, when we find out it's not good, we have to do the opposite. We have to debit account receivable and credit check, credit the cash. And we credit the cash for the total $585. What I just did is I just went through the journal entries to make sure you record the journal entries. You only do the journal entries for the bookside, okay? The bank you don't do. If the bank made an error, that's their problem. They have to, when they prepare their bank reconciliation, they will have to make this adjustment. So remember, the journal entries are only for the bookside, okay? So any issues you had on your books. You had, well, not any issues, anything you need to update your books for. You had an error. This was an error. And usually, an error could be a positive or minus. For example, if you wrote the check 4560 and you deducted 650, then the error will be positive $90, okay? Because you deducted so much from your checks. This was the GL and this was the check. I'm flipping the scenario. It could happen that you wrote the check 4560, but you recorded it for 650, okay? So the error will be positive. Therefore, actually, you will debit cash and credit advertising expense. But that's not the issue here. Service charge is a typical one. Make sure you get to the service charge. You debit miscellaneous expense or on the exam. If there's a bank service charge, look for bank service charge. If not miscellaneous expense, debit expense, credit cash. And for the non-sufficient check, it's the opposite of what happened when you received the check. You debit or receivable and credit cash. Now, again, at the end of this recording, I'm going to ask you again, if you are studying for your CPA exam, to take my challenge. Basically, my challenge is, are you willing to risk $30, which is my subscription now, to find out if I can help you, if my lectures, if my system can help you improve your scores substantially. Now, my lectures are mapped out to those courses. So it's easy. If you have those courses, it's easy to follow because they're mapped out to these courses. Are you willing to take that chance? That's up to you. Anyhow, once again, if not for anything, check out my website to see how well your university did on the CPA exam. As always, I'm going to ask you to study hard. Don't shortchange yourself. Your CPA exam is a lifetime investment. And of course, stay safe.