 Keeping cash in a bank account helps control cash because banks have established practices for safeguarding customers' money. The documents used to control a bank account include a signature card which authorizes who has access to the account, deposit tickets which summarize the amount of deposits, checks which provide a paper trail of cash spending, electronic funds transfers, sometimes known as EFTs, this is a system of transferring money directly from one bank account to another without any paper money changing hands. The chances for theft are reduced when the cash never comes to the company. So while having cash in the bank is more protected than in other places, we still have to verify that the amounts are correct. And in doing so, we need to remember that there are two records of a business's cash. The first is the cash account in the company's general ledger, commonly referred to as the book. The second is the bank statement, which shows the cash receipts and payments that have cleared the bank. The book and the bank statement usually show different cash balances. Differences arise because of time lags in recording transactions. For example, when a company writes a check, they deduct it from cash with a credit. Their bank does not subtract the check from their account until it clears the bank, which could be a few days later. If the end of the period falls in between those times, this will cause the cash balance to be different. In this example, check numbers 207 and 208 were written and deducted from the book balance, but haven't cleared the bank by the end of the period. These become reconciling items due to time lag differences. The process that we go through to determine the differences between the cash account and the bank statement balance is known as a bank reconciliation. Reconciliation is the process of explaining the differences in the balances. A bank reconciliation is done at the end of the accounting period and is part of step five in the accounting cycle, adjusting entries. The result of the bank reconciliation will be to adjust the cash account and use the adjusted balance for cash on the balance sheet and the statement of cash flows. Since there are two balances for cash, we will reconcile both the book balance and the bank statement balance in the process to determine if something reconciles the bank side. I often think of it in these terms. It is stuff the book knows about, but the bank does not. The three most common items are deposits and transit, outstanding checks, and bank errors. Deposits and transit are receipts that the company has recorded, think debit to cash, and sent to the bank to be deposited, but the bank hasn't recorded them yet. This could happen if the end of the month falls on a weekend. They are added to the bank statement balance in the reconciliation process. Another example of something the book knows about but the bank does not are checks written but that have not yet cleared the bank. These are known as outstanding checks. They are deducted from the bank statement balance in the reconciliation process. The final item that reconciles the bank statement balance are bank errors. Again, the book knows about a bank error and the bank does not. If the bank knew about the error, it would have fixed it and the error wouldn't exist. Bank errors can either add or subtract from the bank statement balance depending on the nature of the error. This might require some critical thinking to figure out, so keep that in mind. The result of these additions and deductions from the bank statement balance is an adjusted cash balance. This number will be compared to the results from reconciling the book side. To determine if something reconciles the book side, I often think of it in these terms. It is stuff the bank knows about but the book does not. There are many more items that can reconcile the book side. Some of the more common items are bank collections, interest revenue, bank service charges and fees, EFT payments, NSF checks, and book errors. Many companies have customer payments sent directly to the bank instead of the company. This improves internal controls over cash and speeds the collection process. If these collections were not recorded at the time of receipt, they need to be recorded at the end of the period. Some bank accounts earn interest. Often, companies don't know how much interest they've earned until they receive a bank statement. Both of these items add to the book balance for the cash account during the reconciliation process. Bank services are not free usually to businesses. EFT fees charged for services or check printing, etc. need to be deducted from the cash balance. EFT payments are electronic payments directly from one bank to another and often are automated. If a company hasn't recorded these yet, these need to deduct these EFT payments from cash during the reconciliation process. NSF checks are checks that a company's customers have written them, but the checks are no good. Initially, these customer deposits increased the cash balance. Now we find out at the end of the month that the checks bounced. So we need to deduct the NSF checks from the cash balance during the reconciliation process. The final item that reconciles the book balance are book errors. Again, the bank knows about the book errors and the book does not. Book errors can either add or subtract from the cash balance depending on the nature of the error. Like bank errors, this might require some critical thinking to figure out, so keep that in mind when you're working on book errors. The results of these additions and deductions from the book balance is an adjusted cash balance. This number is compared to the results from reconciling the bank side. They should be the same amount. The final step in the bank reconciliation process is to make adjusting entries for the items that reconcile the book side. These need to debit and credit the cash account, so our ledger balance matches the adjusted cash balance from the reconciliation. And that concludes this introduction to bank reconciliation. I would encourage you to watch the example videos for reconciling the book side and the bank side, as well as adjusting entries to further your mastery of this topic.