 Hello in this lecture we will define bank reconciliation according to fundamental accounting principles while 22nd edition the definition of bank reconciliation is report that explains the difference between the book company balance of cash and the cash balance reported on the bank statement for purposes of computing the adjusted cash balance. In essence what we are going to do here is we're going to take the bank statement usually a monthly bank statement as of the end of the month and compare that to what we have in the books why do we do that because the bank is really a second recording a third party recording of our entire cash account the cash accounts being one of our most important accounts therefore if we can tie out what the bank has reported to what we have been reported we have one of the best and most secure checks to the fact that we have been recording cash correctly so for example we might have the bank statement in this case at the end of February showing the beginning balance showing the activity showing the ending balance at the end of February and then giving us the detail the deposits and the checks and the other types of transactions that would be involved in order to get to our ending balance from the beginning balance. We're going to take that bank statement it's from the bank this comes from the bank and compare that to our books something like this this is going to be kind of an example of our general ledger our general ledger should have all the same transactions recorded because of course our general ledger is recording the cash transactions for cash therefore we should be able to take our general ledger and basically just check it off to all the transactions that are happening in the bank and tie everything out now of course when we do that comparison and we look at the bank balance in this case as of February 28th we see that it does not match our book balance and typically that will be the case why normally when we get down to it it will be because of be because of outstanding checks outstanding deposits outstanding checks and deposits that have been made on our side that have not cleared the bank we expect that to be the case anything other than that are things that we should adjust our account for meaning if there's anything on the bank statement that's not on our books probably the case that we need to fix our books there's anything on our books not on the bank statement probably outstanding checks outstanding deposits those are the reconciling items that we will put on the bank reconciliation so when we do this comparison we see that we can check everything off but the withdrawals and the bank service charges and there's a couple outstanding checks here that if we ticked everything off which we won't do at the time we would have that but we see that we cannot we have these items on the bank statement that are not on our books so we made a withdrawal and we have bank services charges that we did not yet record on our side those are things that we are going to have to adjust we could put those on a bank statement to adjust them later or we could just basically make that adjustment and it would look something like this we would be increasing our cash here by the 82 and having having that go to some other account in this case miscellaneous and bank service charges and that would be changing our bank balance for the items on the bank that we need to record the we have recognized from the bank statement that we need to record then the things that are left that are the difference will be in this case the outstanding uh checks and the outstanding deposits therefore now we can take basically the bank balance and reconcile it to our balance so here's what the bank had we're going to say hey these checks were outstanding we know exactly what they are they were made at the end of the month so it would make sense that the bank has not yet had time to process those they will they be processed next month in march we have the same thing for the outstanding deposits this one was made at the end of the month therefore it has not cleared the bank that would be to be expected therefore we can see this is the bank balance that we can then adjust by those outstanding items to our balance and we tie out here why is that important it's important because if we know exactly what that differences is are exactly what they are then we also can have some assurance that all other transactions have been recorded correctly meaning that we haven't had some transactions made that weren't recorded in our books or we didn't um record something in our books that didn't happen those are the kind of things we're checking for in the bank statement in the bank reconciliation probably one of the most important checks that we should have after the double entry accounting system itself