 QuickBooks Online 2023, Bank Reconciliation Myth Busting. Prepare to start moving on up with QuickBooks Online 2023. Here we are in our GIC Great Guitars practice file. We started up in a prior presentation with a 30-day free trial. We also have open the free QuickBooks Online sample company. If you want the two open at the same time, we suggest using Incognito or another browser. You can open Incognito if using Google Chrome by selecting the three dots in the browser. Incognito window typing into the search engine. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. QuickBooks Online Test Drive. We're going to use the sample company to compare the accounting view the one get great guitars is in and the business view the one the sample company is in. You can toggle between the two views by selecting the cog up top and switch the view down below. We're going to duplicate some tabs to put reports in like we do every time right click in the tab up top and we're going to duplicate the tab right click the tab up top duplicate the tab back to the tab to the middle. Go to the reports on the left we're going to open up one of the favorites that being in the standard reports the balance sheet report. And if you're in the business view by the way the reports are located in the business overview and then the reports on the left hand side. So then we're going to go to the tab to the right and back to the reports other favorite report is the income statement the P and L the profit and loss change or close the buggy so we can then change the range from 010123 to 022823. Let's do it on a side by side month by month system here and then run it so we have Jan we've got Feb we've got the total and then let's go to the tab in the middle close up the hand buggy and change the range 010123 to 022823 and then run that report as well. Let's do this one also as a side by side for this presentation months and run it so we've got the as of the end of January as of the end of February numbers. Now we want to talk about bank reconciliations focusing primarily on some items which I believe are misconceptions around bank reconciliations misconceptions which may stem from the way the software kind of helps us to do the bank reconciliation process as well as the use of bank feeds which can kind of complicate the way we think of how the bank reconciliation process works. So the first thing I want to point out is that the bank reconciliation process is a huge internal control in other words it's a huge check against us making data input errors. The first check that we have against making data input errors is the double entry accounting system itself. The fact that you're putting data into the QuickBooks system and the QuickBooks system is forcing assets to equal liabilities plus equity the fact that QuickBooks will not let you put something generally into the system which will throw it out of balance means that you have a huge internal control over somebody that's just doing their books by hand just writing it out for example or doing it in Excel without a double entry accounting system. So just using accounting software like QuickBooks which forces that to take place is a huge internal control even though many times when new users are using QuickBooks accounting system it becomes tedious because they're like why won't QuickBooks do what I want it to do oftentimes it's because QuickBooks is trying not to let you do something that will put it out of balance and so that's huge the second huge internal control is the bank reconciliation process so reconciling that the cash account is a huge internal control it's something that large companies should do it's something that small companies should do now the way you do it might differ depending on how you have the bank feeds set up and what type of industry you are in it could be an easier or more difficult process but every company should have some verification process of the cash and that's not only just because we're trying to verify cash itself we're not trying to just verify the balance of cash at any given time cash is important we want to make sure it's not it's very liquid no one's stealing it and stuff like that but we're trying to verify all the transactions in cash and given the fact that cash is involved in every accounting cycle that will give us verification on the on many other sides of the of the transactions as well so it gives us a double check on the entire double entry accounting system to a large degree so for example if I'm a if I'm an accountant and I'm doing taxes or I'm or I'm trying to verify whether some some set of books is accurate or not if someone just gives me a handwritten ledger I'm I'm quite dubious as to whether that and it's there's no double entry accounting system that just give me like an income statement or something like that I have very little faith that that's going to be a completely accurate statement because it's it's there's no double entry accounting system that's even helping it to stay in balance if they did it by hand and use the double entry accounting system which is very rare these days for someone to do I have a little bit more assurance if they put it into QuickBooks I have a way more assurance but I'm still going to be skeptical that they didn't input all the data or something like that if they put it into QuickBooks and do the bank reconciliation and they haven't fudged the bank reconciliation which we'll talk later in terms of like forcing an entry into the bank reconciliation then I have a much much higher degree of assurance even if it's a small business and not like a professional CPA firm it's way bit it's way bigger assurance then then then if you just did it by hand so that would be the general kind of idea or thought process of it now the two major kind of myths I think that are out there with regards to the bank reconciliation is one we get confused of doing the process of making a bank reconciliation and with the actual bank reconciliation report itself in other words to do a bank reconciliation we're going to go to the tab to the right and we're going to go then to the accounting tab over here and then we're going to go into the to the reconcile tab and we'll actually start our reconciliation I won't go into it at this point but that's that's the general idea if you were in the business view you would be going to in the sample company you're going to be going to the bookkeeping and then down here in the experts to the reconcile tab so and within there will start the reconciliation later but the general idea is that you're going to be comparing if I go back to my balance sheet what is in our accounts on the general ledger so if I go into our accounts in here all the transaction detail in here we're going to tie out basically to the bank statement we're comparing what we have on our side to what is on the bank statement and oftentimes we think about that process as like a bank reconciliation but the fact that we do that is very important and the fact that we may not actually look at the report that is generated from that still doesn't mean that we're not we're not getting the value of doing the reconciliation but what's actually the reconciliation is actually going to be a a report that we're going to have and it might look something like this we can summarize it but it's going to have the the the cleared balance total clear transactions and this is going to be the balance that will be on the bank statement and then it's going to have the unclear items the timing differences items if there are any which there may not be if in some situations we'll talk about that in a second to reconcile to the amount that's on the register the register balance so that's what we're looking for that that difference now you might think if you look at this and so in other words you might think of it this way you're going to say okay if I look at my if I look at my reports here for cash as of the end of February I've got a 95 944 06 if I go to like this is my mock bank statement or let's look at it in January in January I've got 88 810 25 if I go to my bank statement maybe I have as of the same date 61 241 85 in this case the bank statement that's given to us from the bank doesn't tie out to what's on our books does that mean that our books is necessarily incorrect not necessarily it depends on the situation right so now so what I want to do is reconcile between what's on the bank statement in the books what should be the difference we would expect the difference to just be the outstanding items the things that we put in our system that haven't cleared the bank outstanding checks and outstanding deposits the way we do that is we're going to check off all the detail in every transaction so that we can find find the diff find any differences and if the differences are legitimate they're things that we put in our system but the bank doesn't know about yet then we're just going to create those as the out as the reconciling items it's just a timing difference so you might say well am I doing that whole purpose why am I doing that then if I don't have to adjust my books after I do the bank reconciliation even if everything's right is it just to get the cash account correct no it's not just to get the cash account correct because remember every other transaction in here if I go into it has another side of the transaction an expense account the other side was furniture and fixture the deposit account the other side was you know income or something or you know it's the check account the other side was an expense account so by verifying not just the ending balance but by verifying every transaction that went through cash because cash is the lifeblood of the company because we're using a double entry accounting system we're verifying the other side of the transaction as well and we can see that basically on a flow chart here so obviously on the vendor cycle what happens whether we're on a cruel basis or a cash basis at the end of the day we expect money to be going out in order to purchase goods and services if I can verify the transactions of that money going out it may not verify every transaction in the cycle because some transactions such as accrual transactions might not have cash involved in them but it'll give us a pretty good very you know a pretty good internal control if I can double check those by a third party by the bank and then on the customer cycle at the end of the cycle whether we're on an accrual basis or cash basis we expect cash generally to come in for goods and services that we provided to the customer so if I can verify all the deposits and double check them to the bank then we should be in pretty good shape and obviously on the employee cycle we expect money to go out now the other thing that people get confused about I think is the bank feeds and we'll talk more about bank feeds in a future section or a course but let's just think about when the bank feeds might be useful and how you might set up a system it's usually the revenue cycle that gets a little bit confusing with the bank feeds so let's talk about it first there's a couple different ways we might set up our revenue cycle and it'll be dependent on the industry as we've seen in the past we might for example have gig work the easiest thing would be that we have like we're just getting paid by YouTube or something we wait till it comes through the system we add it to our books using the bank feeds we get the information actually from the bank in that way and we might use a deposit form in that case we're actually constructing our books from the bank so there's not going to be any timing differences that way because I didn't enter the revenue on my side I just waited till it cleared the bank and then recorded it it's still important to do a bank reconciliation but the bank reconciliation will be super easy and you can verify your cash account in real time because it should tie out to what's on the bank statement or you're running bank balance because you're creating your books from the bank statement but that's not usually what people do you can only do that if you're in a certain industry where that's something you can do like if you're at a cash register for example and you're collecting cash from clients you can't just put the cash directly into the into the bank you're using now a sales form so once you use the sales form at the cash register you're going to want to check your cash to what you actually have in the cash register you're going to compile all your cash together and usually you're going to have to put it into that clear it account undeposited funds or funds to deposit and then deposit it into the bank as one lump sum so in that case you can't for internal control purposes you can't just wait until you get all the money that you collected in the day and then deposit into the bank and then wait till the bank clears your cash to record it as a deposit in your system because you want to record the sales as you make the sales and have the records of recording the sales possibly the customer names if you're collecting that but at least the individual sales that were made you want to double check what's in your register to what's on the sales receipt for the day and so therefore you can't really do that you're going to enter them into your system first and then you're going to deposit it usually into the bank yourself right and then you're going to use the bank feeds if the bank feeds are on to double check to verify so now you have you've entered it on your side the bank is going to enter it on their side and you could use the bank feed to double check it'll be the matching thing but the bank feeds not going to record a new transaction generally in that case and the bank feeds are helping you to reconcile now so you're not actually constructing your books from the bank you're using the bank as a double check that's what a reconciliation in a full service accounting system is designed to do the bank should be doing your books on their side you're doing your books on your side you're double checking the two the fact that you have two people doing the books and they reconcile they're the same except for timing differences outstanding checks and deposits means that you have a double check an outside check that everything's going right if you if you have a full service accounting system where you have to build a client then you've got an a cruel component you've got accounts receivable no cash impacted by this transaction although you're recording the revenue then you're going to receive the payment now you've got the cash and then oftentimes you might then have to do the last step of depositing as we've been the practice problem and again in that case you're not going to wait till the deposit clears the bank in order to track when you're going to record revenue and usually when you're going to record the deposit on your side because you have you have to enter the invoice in order to track the accounts receivable so you see you can't just make you can't just make your books from the bank feed in that case because you're required due to the type of industry you're in to invoice first and then receive the payment and then you're going to use the bank feeds normally to double check the money that you've received now you could use bank feeds to kind of try to match to an invoice or or any part any node in the process here we'll talk more about that when we get into the bank feed section or course but that's the general idea it's really only that really simple business where you're getting paid by a platform that you can just build your books from the bank feeds now on the underside many businesses might be in a situation where they can basically construct their books from the bank feeds because it used to be that we wrote checks we wrote checks and checks take a long time to clear we write a check we send the check out we want to be able to verify if someone has an issue with the money that we paid them whether or not we've wrote the check number one and then number two did it clear has it cleared the bank so there's going to be a big timing difference between when we write the check and when the check clears because it has to be gotten by the other person and then deposited and then clear so if you're writing checks you certainly want to enter the checks into your system so that you can track the unclear checks you've got to do a bank reconciliation process to do that but a lot of businesses small businesses in particular are going to do a lot of electronic many all business are going to do a lot of electronic transfers doing electronic transfers you don't have this big timing difference so possibly in that case you're just going to you're just going to set up automatic wire transfers for your telephone your utilities and what not and all that kind of stuff and instead of you entering into them system as a check or expense form when you pay the bill you're just going to wait till it clears the bank and then record it with an expense or check type form as it clears the bank using the bank feeds so in a similar way as the deposit situation down here we would therefore be constructing our books from the bank we're not doing the double we're not double checking our books we're just building our books from the bank therefore we're not going to have any differences from the bank therefore we can still think of a bank reconciliation but it will be a quite easy bank reconciliation because our balance should match what's on the bank side of things because we're constructing our balance from the bank but if you're in it as larger companies usually then often will want to enter bills into the system so that they can track when they're going to pay the bill and try to pay it as late as possible now you're entering an accrual component into the system and therefore it's going to it's going to complicate you're going to have a full service accounting system where you're going to have to track the bill and then you're usually going to make the payment and then when you pay the bill and then you're going to use possibly the bank reconciliation to verify to match not to record anything but to double check the recording the bank reconciliation is therefore being part of or the bank the bank feeds being part of the bank reconciliation process so that's that's the that's going to be the general idea with those two those two kind of components that I think people get confused on now just in terms of when the bank reconciliation happens if you're working in real time typically you're going to enter the data for January you're going to get the actual bank statement sometime in February now a lot of people because we got online banking and everything they want to just just go online and just print out something from their online banking to do the bank reconciliation you don't usually want to do that because the bank statement is the a very solid line of this is where we stopped last time this is where we were at and this is where we're at as of the end of the month so they've very well delineated time frames so that we can see where we stand as of a point in time if you just print out the data as it flows through your statement you don't have that that defined delineation it's going to be difficult to reconcile so you want to actually the bank statements are useful for the bank reconciliation process you're going to get something like this this is just a mock bank reconciliation and and then so that we can so that we can compare it so obviously we're going to get the bank reconciliation for January in some time in February and then we can use that to compare to to the January data and reconcile the system and then in February we'll get the bank statement sometime in March now in some cases a lot of times businesses are not behind in terms of when they do the reconciliations and they might do multiple reconciliations at you know at a time so now I didn't do one for January I gotta do February and that's what we're going to do in our practice problem here we did this deliberately in the practice problem so that we can have a full section based on doing the bank reconciliation for the first bank reconciliation which is a little bit more difficult often time and then the second reconciliation is more representative of how the reconciliations would go then going forward and sometimes you might be in a situation where you're working for someone and you did a whole years worth of data possibly pulling it in from the bank feeds or something like that to try to construct their data to help them do their tax returns or something and in that case you might pull in you might do the data you have to pull in the data and then reconcile kind of as you go type type of system so that's going to be the process with the time frame and then just the general idea with the bank rex when we go into the actual data here we're going to compare what's on our system to what's on the bank statement and the general idea is that if there's a transaction on the bank statement that is not in our system the bank statement is usually going to be right unless you're claiming that the bank statement has something on it in error which often isn't the case but sometimes it could be some transaction might not be right you might try to that's when you would find it but if there's something on the bank statement that shouldn't be on our side then we're going to have to add it to our quick book system right and if there's something in our quick book system that's not on the bank statement are we wrong not necessarily because it could be an outstanding item outstanding check or deposit depending on how our system is set up and if it is a reconciling item if for example we had something in our system that's not on the bank statement and it was entered as of like January 30th or something we would say well maybe it just hasn't clear the bank yet and therefore because we're doing the bank reconciliation as of the January 31st date sometime in February because I didn't get the bank statement until February I could then go online and double check to see if that transaction cleared the bank in February if it did it would be a reconciling item it would be a timing difference it would be an outstanding check or deposit and that's and so that's what we're looking for we'd be okay with that we'd say that's fine and then I and then when I run my reconciliation report that will just be one of the differences to reconcile if we know exactly what the difference is then we're confident not only that the ending balance is correct but we're confident about all the transactions checking account if we're confidence about all the transactions we entered into our cash checking account in QuickBooks then we're also fairly confident that the other side of the double entry accounting system which includes the vendor cycle the customer cycle and the employee cycle is correct and that and that verification verifies once again not only just the cash account but gives an internal control a double check that we're not making errors on the entire accounting system okay so in future presentations we'll do this one at a time we'll do the first bank reconciliation for January which usually has its own little kind of issues and problems and then we'll do one for February