Accounting Basics Part 7 – Reconciling the Bank Statement Today we’re going to talk about preparing bank reconciliation. First of all, I just want to spend a little bit of time talking about why that was important. It’s a part of the internal control procedures with cash. It’s very important to have measures in place to safeguard cash in a business. It’s the number one thing most subject to theft. I mean we hear right and left about people that have embezzled businesses, and so it’s very important. This gives us an external record. We’ve got our own internal records, the company does, and then the bank, trying to make sure the bank matches. So the real purpose of the bank reconciliation is to make sure what the company says that they have agrees with what the bank says that they have, and I know I meet people all the time, especially in this electronic age where everybody just checks online to see how much money they have. But that doesn’t really work with a business, because they have so much coming in and going out, checking online is not the way. It is not a good control procedure over cash. So, to prepare a bank reconciliation obviously we need to wait for the, we need to get the reconciliation from the bank and then compare what we have on our records from all those transactions that we’ve analyzed, and here is a bank reconciliation for Power Networking. This is for the month of July 31, 2011. So notice how it’s got the three lines at the top. It’s not necessarily a formal statement that’s going to external parties like our financial statements are, but it’s just good practice to put those things at the top, so we know what month it is and what business it is and what we’re doing here. Alright the two sections you want to look at on the bank reconciliation are, there’s really two sections. There’s the bank side, what the bank statement says we have, and if you’re like me, I still get a paper bank statement every month. I always want to know what does the bank say I have, and what do I say I have. What kind of differences are there between the two, because when we reconcile it we’re going to try to find all those differences. So when we’re looking at these things and we’re working a bank reconciliation, we always want to be asking ourselves, when we read about different reconciling items which is going to be the way problems are written, is do I need to fix the bank’s records or do I need to fix my records? You know as you go to deposit money in the bank that bankers, they quit working early, so what is it after 2:00 or 4:00, depending on your bank, they’ll advertise, they’ll let you know after a certain time it’s going to be reported on the next business day, even if you’ve done it inside the bank. So there may be some deposits in transit if you made it just before the cut-off on your statement. So, deposits in transit are always things we want to fix on the bank statement side, because we knew we had it. I knew I had it when I put it in the bank, but the bank might not have known. Okay, also if you write checks, if there’s anything outstanding that has not cleared the bank, that would be something that we have to fix the bank’s records for, because they wouldn’t know. So, those are probably the two most common adjustments on the bank’s side, but you know, sometimes the bank messes up; they make a mistake, so you want to look at your state…you always want to be looking, checking the bank as well as yourself. I mean, most of the time I find when I’m reconciling these things it’s my error; I made some stupid little error, but sometimes the bank is wrong. Sometimes they charge me fees that I’m like, oh, my goodness, my bank got bought out by another bank and now they’ve changed my terms and now this bank wants to charge me a fee. So you want to look at those things again to get your records in line, as a good control over cash. So if the bank made a mistake it could be either an add or subtract. Now, most of the time if

the bank adds money, if there’s more money in there; if your deposit was more than you thought it was, you’re probably not going to call the bank and tell them they were wrong. A lot of times people don’t want to do that, but in reality, I’ve found that the bank always figures it out anyway even if it was only fifty cents they’ll send something in the mail, we’ve corrected your records. So, anyway, when you try to reconcile, the bank could have made an error and that would be something that goes up there as well. As far as, the company in this case Power Networking, there are things that are added and deducted here. Here we notice that a note and interest collected by the bank is added. All right, and what is, what does that mean, a note and interest collected by the bank? Sometimes the business clients have the bank collect their notes for them, and they go right into the bank, and in that case maybe the company found out when they got their statement that a note had been collected and put in their account. So they added it in, always a good thing, and then there’s those things that the bank charges us for perhaps the regular service charge. Also, you’ll notice here a check returned due to insufficient funds. Now this is a check, would be a check that a customer gave us, and what happens if you get a bad check in a business? The first thing that you’re going to want to do is try to collect it, right? Because you know the older it gets the less likely it is that you’ll collect it. So it becomes a receivable, and we have to take it out of our deposit. We thought it was a deposit, now we have to take it out, so that’s why it’s subtracted down here. The bank knew about it, but we didn’t know about it until we got our statement perhaps, and then down here’s an error. If we’ve made any sort of error, now errors have to be figured out individually. Sometimes they can be an add and sometimes the can be deduct. Did I make an error that made me look like I had more in the bank or less. Alright, in the end, when you do a little drum roll at the end is when you make sure that these two are in agreement. So, I’ll go on to the next page, because you should have a handout that you’ve downloaded on preparing a bank reconciliation and this is for the Kidstock Company for the month of October. So I’ve already put the name of the company, the statement name and the date here. Now, see how it says cash balance according to the bank, that’s usually the first thing that I want to do is find, well how much did the bank say that I have? And when I’m reading here, going through the items, the cash balance according to the bank is $4,457.25, so I’m going to go ahead and put that here. Alright the other one that I want to fill in right away is what pertains to the company, what did the company’s records say that I have, and in this case it is $7, 671.45. Alright, other things that I may read about on here, it says that I have checks outstanding of $2,276.20. Whose records do I need to fix for those checks? Well, I knew I wrote those checks so I’ve already deducted them, but the bank doesn’t know and they’re going to be a deduct again. Checks are always a deduct unless you’re correcting an error and in that case it can go either way. My outstanding checks, it says here were $2,276.20. Okay, going on down the page it tells me we have deposits in transit not recorded by the bank, so it’s already telling me in this problem that these weren’t recorded by the bank, which means we need to go ahead and fix the bank’s side, and so I’m going to call them deposits in transit for $5,780.40. Alright, going on down the page, it says, a check for $145.00 in payment of an account was erroneously recorded in the check register as $451.00. Oh, that’s one of those transposition errors. I’m famous for those, but it’s very common to have a transposition error, in other words transposing some numbers. Alright, when you read about something that was wrong, in order to correct it you need to get the difference. So

to do that we would take the difference between 451 and 145, which is 306. Okay, it says that we, we made the mistake in our check register so it’s going to come down here on my side, but what I have to figure out is do I need to add it or subtract it. Remember errors go either way, so it says it was a $145.00 check and I wrote it, I recorded it for $451.00. Alright, so if I, I recorded it for too much, didn’t I? I took too much out of my account, so if I’ve taken too much out of my account, I have to add it back. This is a case where a check is not always a deduct, because I deducted too much when I recorded it for too much, so I’m going to take that $306.00 that we sub.., that we got by subtraction and call it a depositor’s error. Okay, the last thing down here says a bank debit memorandum charges of $16.00. What is that? Is that a service charge? I think so. What happens with service charges? Well, you know if you have an account in the bank, if they charge you, you don’t find out until you get the banks records, you’re going to have to deduct those charges, so the deduction would come down here and it’s $16.00, point not a comma. Alright, have we taken care of everything? I think we have. I think we’ve taken care of all the items there, again, this was a very simple reconciliation, but I think it illustrates how to do a statement. We don’t need to have a long confusing one to learn. Alright, so to come to the final number, the adjusted balance, it’s very simple; you start with your top number. Okay, according to the bank we’re going to add whatever it says to add, in this case we’re adding deposits in transit, we’re going to deduct outstanding checks, and what is left? The adjusted balance of $7,961.45, and again you’ll have to calculate that when you’re working on a bank statement. Alright, and then when we come down here, cash balance according to the company we’re adding the $306 dollar error, a lot of people that have had trouble understanding why you’d be adding an error, but yes you can make a mistake and take too much out, deducting for the service charges, coming down you should have an adjustment balance of $7,961.45, and that’s all for this video today.