Steps in a Bank Reconciliation - Accounting

Alright, let's talk about the steps of Bank Recon

This is one of those ones that can be very daunting because there's a lot of moving pieces that you need to keep up with

So I'm going to try to make this as simple as I can as we go through these to kind of show you my way of doing it

and hopefully this will help you out as you go through. But when a problem asks you to do a Bank Recon, it's really important that you understand that there's two sides to a bank reconciliation

You have what's called the Bank side and the Book side. So let's start there

When I ask you to do that, we're going to start with a Bank side and a Book side

book side. So there's my bank side, there's my book side, okay? And each of those has the same

starting place respectively. The bank side and the book side are going to start with what we call

the unadjusted balances. The unadjusted balances come from their respective place. So the unadjusted

bank balance comes from your bank statement, okay? So we're going to start there, unadjusted bank

balance, whatever it may be, and that comes from the balance on your bank statement. The book side

is going to do the same thing, except it's going to be the unadjusted book balance. That's going to

come from your books. It's going to be, comes from your cash tea table. Now, ideally you would want

these to be the same. Rarely are they ever be the same because of what we just talked about in the last video. So now let's go through some of these commonalities and kind of going to show you how

this bank reconciliation works, questions that you need to ask. So first let's talk about deposits

and transit. Again, deposits and transit are the ones that we got a check that we're going to

deposit in the bank. So once we got it, we went ahead and put it in our books. It just hasn't

went through the bank yet. It hasn't been processed by the bank yet. So we got to figure out where

we're going to put it. So let's ask ourselves these series of questions. I'm going to start

with the book side. Has it affected my book balance yet? Yes, it has. Why do I know that

It's because when I got the checks, I put them in my books. I just had, they haven't gone through the bank yet. Okay. So yeah, they've, they've affected my bank balance. That means that

unadjusted book balance right there has already been affected by this deposit in transit

I don't need to do anything to the book side. Okay, that's question one. Let's go to the next one

Has it affected my bank balance already? Well, no, because it hasn't gone through the bank yet

There my key right there So no it hasn All right so the next question how did it affect my book balance What did it do to my cash balance If it affected my book balance which we already said it did what did it do

Well, when I put it in my books, it made my cash go up. So it makes my balance go up

So what do I need to do to the bank side to match the book side? I need to add it to the bank side

And so therefore, what I'm going to do is I'm going to say add deposits in transit of however much that money is, however much that amount was

Okay, that's deposit in transit. Now let's look at the next one, outstanding checks

Same questions. Has it affected my book balance or my book side? Yes, it has

because the moment I got those, I wrote those checks, I wrote in my books. Okay

has it affected the bank yet? No, because they haven't got it yet. It hasn't gone

through the bank yet. How did it affect my book side? Well, it made my cash go

down when I recorded it in my books. So what do I need to do to the bank side in

order to match the book side. I also need to make it go down or subtract out

outstanding checks. So I'll say less outstanding checks for that amount. That's how outstanding checks work. Alright let's look at another one. Like I

said sometimes the banks collect AR for us. They collect accounts receivables

Instead of the customer sending it directly to us and then we taking it to the bank, they just send it directly to the bank. And when that happens I don't

know what's gonna happen until after it's too late. After I get

my bank statement. Okay. I haven't put it in my bank yet. So let's go through those questions

Has it affected the book side? No, it hasn't because I didn't know anything about it. I

couldn't put it in my books until I got my bank statement. Has it affected the bank balance? Yes

they got it. They have it. How did it affect my bank side? Well, when they received it

it made my cash go up. So what do I need to do to the book side in order to match it? Well

I need to make it go up. So I'm going to add AR collections

And there you go, add AR collections. Can you pause that just for one second

You don have to stop it just pause it Sometimes we earn interest in the bank Our money in the bank so we earning interest We don know we going to get it until we get the bank statement So let go through those questions again Has it affected our book yet Well no it hasn because again we didn know

it until we got the bank statement. Has it affected the bank yet? Well, yeah, they got it. And they're

not going to send us a check and then we just turn around and put it back in the bank. They're just going to go ahead and put it into our account. So yes, it's affected our bank side. How did it

affect our bank side? Well, it made our balance go up because it's the interest that we earned

So what do I need to do to the book side in order to match the bank side? I need to make it go up as well

So I'm going to say add interest earned. So that's what we're going to do, add interest earned for that amount

All right, another one, bank service fees. Again, sometimes the bank charges us to use their services

They're not going to send us a bill and let's turn around and send them a check. They're just going to take it directly out of our bank

But we don't know they do that until they send us the bank statement. So let's go through those questions again

Has it affected our book balance? Well, no, because again, we didn't know it. We hadn't written in the book yet until we got the bank statement

Has it affected the bank? Yes, they took it directly out of our account. How did it affect our bank balance

Well, it made it go down. They took it away. So what do we need to do to the book side in order to make it match the bank side

We need to also subtract it. So we will subtract or less bank service fees for that amount

last common thing that we can see when it comes to bank reconciliations is everyone's favorite

non-sufficient funds or a bounced check okay somebody gave us a check that's not worth the

paper it's written on we assumed it was good when we got it and so when we got it we wrote it in the

books as our cash went up but when we took it to the bank they said it bounced like a basketball

and it's not worth anything so we need to correct this okay so let's look at the questions and then

be careful with these though. Okay? So has it affected our book balance already? Yes, because

when we got the check we thought it was good and we wrote it into our books as it increased the cash However did it affect it correctly No because we said it added something and it didn So it wasn in there correctly All right Has it affected our bank balance already

Yes, because it's worth nothing and it did nothing to our bank balance. So it actually affected it

correctly. It was worth zero and it affected our bank side zero. So really our focus now turns back

to the book side because we need to correct the mistake on the book side. So what do we need to

do in order to match the bank balance? Well, we added it to begin with on the book side. So it's

worth nothing on the bank. So we need to take it back out. So in order to do that, we're going to

subtract the NSF checks. We'll say less NSF check for that amount. All right. So those are just

again, commonalities. There's many more that you can have under there, but these are the common ones. Once you're finished, then you're going to total these up and you're going to find what's

called the true cash balance. And the true cash balance is going to be the same for both, or at

least you hope they're going to be the same for both, because that's what ultimately you want

Remember, we're bridging the gap between the two, so they must equal the bank side and the book side

Otherwise, you've done this incorrectly. That's step one of the bank reconciliation. The next step

this is the last thing we have to do, is the adjusting side. If an adjustment is made on the

bank balance, so on the bank side, we do nothing. Once it's there, it's there. So these two things

that we added right here on the bank side, once they're there, they're there. We don't do anything

We don't need to make an adjustment entry or anything because those are the things that's already on our books but not on the bank. Then we have the book side. If an adjustment is made

on the book balance, then an adjusting journal entry is required. So anything on the book side

those four things we added on the book side, those all have to have corresponding journal

entries to correct them because those are the things that are not on the books yet. We need to put them on the books

So in the next video, I'm going to show you how to do this from start to finish, bank

reconciliation with the adjusting entries. Hopefully that will make a little bit more sense to you once you get there

Other than that, have a good one