Want to learn how to do a
Bank Reconciliation? In this video I’ll show you
how to reconcile the Bank Statement
to the Cash Book in 7 simple steps… [Music] Hey viewers,
I’m James and welcome to Accounting Stuff.
The channel that teaches you all there is to know about
Accounting Basics and Bookkeeping Software.
In this video you’ll learn how to prepare a full
Bank Reconciliation like this one
by yourself from scratch.
Looks a bit scary doesn’t it? But don’t worry I’m going to
break down the process for you into seven easy steps that’ll
make this whole Bank Rec business seem like
a piece of cake. I’ve had to review my fair
share of bank reconciliations in my previous life as an
Auditor and today I’d like to share with you the approach
that I find easiest to follow. And before I forget…
this video is a continuation of our series on Accounting Basics,
so if you’d like to see more videos just like this then check out the
playlist up here and don’t forget to subscribe.
Let’s do this… First off..
There are a couple of definitions that we need to clarify…
A Bank Statement… A Bank Statement is a list of all of the cash receipts and withdrawals
that a business thinks it has made over a period of time.
And it’s managed as you would expect by the Bank. A Cash Book is an Accounting record of what
a business thinks it has in the bank along with all the
cash inflows (debits) and cash outflows (credits).
It’s managed by the Business itself,
usually by an Accountant or Bookkeeper.
So on the one hand the Bank produces a Bank Statement
and on the other the Business maintains
a Cash Book. In an ideal world
the closing balances of both of these should equal
each other exactly. However in reality
that’s not the case… and it’s actually the reason
why the Bank Reconciliation exists… To make sure that these
reports agree on what’s been going down in the bank.
I’ll show you how that works in the moment,
but first, let me explain why the
Bank Statement and Cash Book might disagree with each other
in the first place… There are three ways that these
differences can come about… Reason Number 1… Omissions. Omissions relate to transactions
that appear on the Bank Statement but haven’t
yet been recorded by the Business in the Cash Book.
These include things like Missing Receipts,
Interest Received, Bank Fees and Bounced Cheques. A business might not know that
these transactions have hit their bank account
until they receive their Bank Statement at
the end of the month. Reason Number Two… Timing Differences. These are transactions that
are recorded in the Bank Statement
and the Cash Book in different periods.
The two most common Timing Differences are
Deposits in Transit and Outstanding Cheques…
A Deposit in Transit or as some people
like to call it… an Unrecorded Deposit.
Relates to cash that a business receives and
records in it’s cash book during one period but that
doesn’t appear in it’s bank statement until
the following period. Typically these are cheques
or Electronic Fund Transfers that the business receives from customers
towards the end of the month that the bank doesn’t
process immediately. An Outstanding Cheque is
a cheque that a business sends to a supplier in one month,
that might just sit on their desk for a while and not actually get
cashed in until the following month. So again we have that
timing difference between when the transaction is
recorded in the Bank Statement
and the Cash Book. The third way that we get
differences between the Bank Statement
and the Cash Book is because of Errors. Someone has messed up. Now these errors can be made
by the Bank or the Accountant preparing the Cash Book.
But more often than not, it’s these guys… Shhh… So we first look for errors in the Cash Book,
not the Bank Statement. Although that is also possible… Make sense? Good, so we’ve identified
Omissions, Timing Differences
and Errors which can all cause differences between
the Bank Statement and the Cash Book.
The purpose of the Bank Reconciliation is to
identify every single one of these errors so we
know what the heck is going on. It then tees us up nicely to post a
journal into the General Ledger and bring that Cash Book
up to date by accounting for Omissions
and correcting for Errors. Those Timing Differences
in the Bank Statement… well there’s not much we
accountants can do about those except identify them and let
them sort them sort themselves out
in a future periods. That’s all well and good
but why is this useful? Why is it necessary?
Well I touched on it a moment ago,
but the Bank Reconciliation is essential if you want to
ensure that your books are up to date and give
an accurate picture of the business. It also allows you to calculate
the ‘True Cash Balance’ of the business.
That’s how much money you’ve got after all of the
outstanding cheques and deposits have cleared the bank.
So when do these Bank Reconciliations
actually happen? Most businesses prepare their
Bank Recs on a monthly basis after they receive their
bank statements at the end of the month Large companies with many transactions might reconcile
on a weekly, or even a daily basis.
Whereas smaller companies with very few transactions
might only reconcile their cash account once
every six months. Right, I know what
you’re probably thinking at this point… James you promised me
7 Steps at the start of this video, where’s my 7 Steps? Hold tight, they’re coming. We’ve dealt with what, why and when,
and now I’m going to show you how to prepare
a Bank Reconciliation. About time! To help you visualise these steps,
we are going to walk through them With an
example company… Chudley Cannons Inc. If your a Harry Potter nerd like I am…
then your probably aware that that’s Rons
favourite Quidditch Team. Trivia Or, if you’ve been following
Accounting Stuff for a while now…
you might also remember the Cannons from my videos
on the Cash Flow Statement. Which are up here.
For this example, we are going to reconcile
the Chudley Cannon’s Cash Account for the
month ended 30th June. And now… The moment we’ve
all been waiting for… Bring on those steps… Step 1
Get copies of the Bank Statement
and Cash Book for the period that you want
to reconcile… So let’s grab those then… On the left side of the screen we’ve got a copy of the
Chudley Cannon’s Bank Statement
from Gringotts. This lists out all of the amounts
deducted and added to the Cannon’s Cash Account
in June along with descriptions and the Opening
and Closing Balances. And beneath me we have a
Transaction Listing for the Unadjusted Cash Account.
This comes straight from the General Ledger and details
all of the transactions affecting the Cash Book. Along with dates,
descriptions, Debits and Credits, Opening and Closing Balances.
You’ll notice that both of these reports are for the
period ended 30th June. They both have a very
similar layout and we do not want to confuse things.
So let’s jot down Bank Statement
and Cash Book to make things clearer. Perfect… It’s time for Step 2.
Set up the Bank Reconciliation Template.
So open a spreadsheet or grab some paper
and let’s give this Bank Reconciliation a header.
Beneath that, we want to divide the page
in two, with the Bank Statement
on the left and the Cash Book on the right.
The reconciliation begins with the Unadjusted Closing Balances
from each report. These are our starting points
and the aim is to calculate the Adjusted Closing Balances
for each side to reconcile these numbers.
To help us with that… It’s useful to note down
the unreconciled amount at the bottom of the page.
The aim of the game here is to get this to zero.
So what’s going on in the middle here?
We’ve got a lot of blank space. This is where all
of our adjustment go. Remember the Omissions,
Timing Differences and Errors that we
talked about earlier? We adjust the
Bank Statement for Timing Differences
and Errors that are caused by the Bank. And we adjust the
Cash Book for Omissions and Errors made by the
Accountant or Bookkeeper. Timing Differences are made up
of Deposits in Transit, which we need to add to the
closing Bank Statement balance. And Outstanding Cheques
that we need to deduct. Bank Errors they can go either way…It depends
on the situation. On the Cash Book side…
Some common Omissions are the Missing Receipts
and Interest that we need to add.
Along with Bank Fees and Bounced Cheques
that we need to deduct. The Errors in the
Cash Book also depend on the circumstances.
There we go… the full
Bank Reconciliation template. We’ll enter the numbers
in a moment. But before that we’ve got Step 3.
Tick all of the matching transactions in
the Bank Statement and Cash Book.
These all agree with each other already so we’re going to tick
them off so that we don’t include them in the
Bank Reconciliation. A quick glance over
the Statements shows us that…
We can see a deposit of $3,592 in the
Bank Statement and Cash Book.
Cheque 104 for $235 also appears in both reports.
As does the EFT payment for $545 dollars.
And last but not least we have the EFT receipt
for $15,982. Cheque number 106
also appears in both statements but the amounts are different Hmm… We’ll revisit that one. Moving swiftly on to Step Number 4.
Here we need to calculate the adjusted Bank Statement
balance. Let’s go…
Our template is telling us that we need to
add Deposits in Transit. Deposits in Transit relate to
Receipts that a business receives in one period,
and that the Bank deposits in another.
So we are looking for a debit that increases
our cash in the Cash Book and that doesn’t appear
in the Bank Statement. On the 30th June,
we can see a transaction for $2,220 that seems
to fit the bill because there is no sign of it
over here. So we need to give that
one a reference, let’s say ‘a’ and add it to
the Bank Statement side of our Bank Rec.
It goes here because that transaction already exists
in our Cash Book, making up part of the
unadjusted balance. Next, we want to find
any Outstanding Cheques. These are the cheques
that the Cannon’s have sent out to a customer
this month, that haven’t been
cashed in yet. They will appear as a
credit or reduction to cash in the Cash Book
because the payment has been recognised in the
General Ledger but there will be no sign of them in
the Bank Statement because they haven’t been
cashed in yet. Hmmm… Cheque 105
jumps out at me. The Cannon’s have recorded
the payment of $910 on the 12th June
and it doesn’t appear in the Bank Statement.
Let’s identify this as transaction ‘b’ and deduct it
from the Bank Statement side of our
Bank Reconciliation. Remember this transaction
already appears in the Cash Book and we expect this customer
to cash the cheque the following month
which is when it will appear the Bank Statement.
So for now we adjust the Bank Statement.
The final adjustment to include on the
Bank Statement side of the Bank Rec
would be any Bank Errors that exist.
We don’t appear to have any here and more often than not,
that’s the case. If you happen to come across
any in your Bank Reconciliations
then it’s best to identify the adjustment and contact the bank
so that they can fix the error ASAP. Look I don’t know, it’s your problem. Sort it out… Now that we’ve worked out
the adjusted closing Bank balance we should
be feeling pretty confident that we’ve worked out the
‘True Cash Balance’ of the business… $53,498. That’s the Cash balance after
all Outstanding Cheques and Deposits have
cleared the Bank. But we won’t know for sure
until we have finished Step 5…. Which is where we calculate
the adjusted Cash Book Balance. That means we’re on the
look out for Omissions or stuff that’s in here…
that we haven’t recorded in here… We’ve already written down
some of the common Omissions in our Bank Reconciliation template
so let’s work through these. Missing receipts are amounts
that have been added to our Bank Account that we
haven’t recorded in our Cash Book. In this Bank Statement
we can see that the Cannon’s received an
Electronic Funds Transfer for $1,000 on the 29th June
and I can’t see that anywhere in the Cash Book so we must have
missed this one out. Let’s reference that as
transaction ‘c’ and add it to our Cash Book balance
in our Bank Reconciliation. Right, what’s next? Interest Received. We are looking for amounts
added to our Bank account that have ‘interest’
in the description. On the 30th June we can
see Interest Received of $107. Has it been recorded in
the Cash Book already? Nah… So we reference it as transaction ‘d’ and add it to
our Cash Book balance in our Bank Rec. Bank fees. These are costs that the
Bank charges us for keeping our account open. I can see that $50 was deducted from our account
on the 17th June and we haven’t included it in
our Cash Book. We’re going to label this one as transaction ‘e’
and this time we are going to deduct it from our
Cash Book balance in our Bank Rec
because we need to recognise the payment.
The last Omission that we’re looking for is Bounced Cheques.
These are cheques that customers have mailed to us,
and that we’ve deposited in the bank. Only to find that these have
been rejected because the customer didn’t have
sufficient funds to honour the cheque.
This kind of cheque is normally labelled as
an NSF cheque. NSF stands for
‘Not Sufficient Funds’. We can see one in the
Bank Statement here… NSF Cheque 2748
and the Bank has deducted $6,000 from our account.
We need to reference this as transaction ‘f’ and deduct
it from our Cash Book Balance
in our Bank Reconciliation. I smell the finish line. The Unreconciled
Amount is now just $45
and all that’s left do is to find errors in the Cash Book.
This is going to be easy to spot because we’ve followed
all of the steps and have ticked and referenced all of the
other transactions already. And as if that wasn’t enough,
we’ve got a note beneath the Cash Account
Transaction Listing that explains what the error is.
Cheque number 106 is for $7,050. And it’s been incorrectly entered
into the General Ledger. It looks as though the
Bookkeeper or Accountant that entered this cheque
made a typo or something because it’s been correctly
recorded in our Bank Statement. No worries,
we will reference that as transaction (g)
and deduct the difference of $45
from the Cash Book Balance in our Bank Rec. Tad Daaaa! Our Unreconciled Amount
is now zero! And that also means that we have
completed Step 6. Check that the adjusted totals
match each other. In order to complete
the Bank Reconciliation it’s critical that the
adjusted Bank Balance matches the
adjusted Cash Book Balance exactly.
That proves that we have recorded all of the
Cash Transactions in the General Ledger and what we’ve
worked out here is our ‘True Cash Balance’ of $53,498.
If you are still getting a difference in your Bank Reconciliation
then unfortunately there is an error somewhere in your workings
so you’ll need to go back over all those steps and
make sure that you’ve done them correctly.
But today not my friend, not today… We’ve crushed this Bank Rec
so we can move on to the last part of the process.
Step 7. Prepare the necessary
Journal Entries. This is very important because
if we don’t post these journals to correct the Cash balance
in the current month, then all of these Cash Book
adjustments will just appear again next time we do the Bank Rec. So let’s do our future-selves a solid. And prepare the journals. We’ll be thanking ourselves later. Just to be clear.. the adjustments that we
have identified in the Bank Statement side
are all Timing Differences. We can leave these be
and they will correct themselves in the future
when the Bank records our Deposit
and when that Customer cashes that cheque.
We are only posting Journal Entries for the
adjustments that affect our Cash Book.
So let’s do it… If your feeling kind of unsure
about Journal Entries then that’s ok… Pause this video and
check out this one up here that I made explaining them. We need to lay out our Journal Entry Template
with the Date, Account,
Debit and Credit columns. For the Date, we’re going
to pick the 30th June for all these entries because
it’s the last day of the month and it makes
month-end correcting journals like this one easy for us spot
when reviewing the general ledger. Going into this,
we also know that one side of each transaction
has to hit the Cash account because
these are all Cash Book adjustments. Let’s take it from the top… Transaction ‘c’
was for Missing Receipts of $1,000.
We are adding this to our Cash account so we need
to debit cash by $1,000 and the other side of the
journal is a credit to decrease Accounts Receivables
because one of our customers has paid us.
Next we have transaction ‘d’. Interest received of $107.
Again this is a debit to Cash because the Cannon’s have
earned that Interest and the other side is
a credit to Interest Income which is a form of Revenue.
In Transaction ‘e’ we were charged Bank Fees so we
need to credit Cash by $50 to decrease them and
debit Bank Fees to recognise the expense.
Then we have Transaction ‘f’ which was for a $6,000
Bounced Cheque. We credit Cash for this too
to reduce our Cash balance and we debit Accounts Receivable
to increase it because the customer still owes us
that $6,000. And on to the final journal.
This one is for Transaction ‘g’ which is an error that
we need to correct. We had mistakenly recorded
a cheque payment in our Cash Book at $7,005
which was actually meant for $7,050.
So we need to credit Cash to recognise the higher
payment value and debit Accounts Payable
to bring those down. Oh yeah.. That’s the full Steps 1-7 complete. All that’s left to do is to
post this journal and the General Ledger will be updated
for the June period to reflect the ‘True Cash Balance’
of our business. Our work here is done. That’s how to prepare a Bank Reconciliation
from start to finish. I hope you find those
7 Steps useful and start putting them
into practice in your real life Bank Recs. Thanks for watching this video if you found it useful,
give it a like, share it,
comment, subscribe if you haven’t already!
There are new videos every week here on
Accounting Stuff. Best of luck with those
Bank Reconciliations. If you keep to these Seven Steps
you’ll smash them every time no problem. See ya next time! [Music]