How to Do a Bank Reconciliation (Step by Step)

[Music] okay so what is bank reconciliation well the key word really is its Kannan right here so reconcile reconciliation it just means to make things balance or make things even right if you get in a fight with a friend you want to make up with them or reconcile with them so the deal here is is that the bank and the company they're kind of just not on the same page like they're not communicating properly aware there's gonna be differences in their books so that's kind of the main thing here is that there's gonna be differences in their books it's we're really just focusing on the cash balance and so the idea with the bank reconciliation is you're gonna actually make adjustments to both sides so both the bank and the company to balance make it even so to speak so there's a lot of different adjustments on both sides and the hard part about this is you have to know where you place each adjustment some adjustments only go on the bank side some adjustments only go on the books side at the end of the month really or the end of the period you want them to balance that's the idea so you make adjustments to balance each side and so there's gonna be stuff involving credit memos something called outstanding checks I'm sure you've heard of that and I'll go over these terms in the next slide here there's stuff like something called deposits in transit and there's even errors so the company sometimes makes errors the bank makes errors and you have to correct those errors that could be the hardest part to be honest a lot of my students struggle with error correction so what we're gonna do here is I'm gonna go ahead and show you kind of how this is set up some of the different terms involved there's some of the rules down here so some of the rules and we'll just go over some of the bigger terms so first off outstanding checks what is that well think about it like this think about the company issues a check right when you issue a check your cash balance goes down but the bank they never got that memo there they're like oh I didn't know you sent a check out we never got that so we didn't reflect it on our side so basically a good way to put it here is that the company issued a check up sorry check by bank never got it so that's kind of the deal the bank just never got the memo they're like I didn't know you issued a check same thing with deposits in transit so deposits in transit is basically the opposite of an outstanding check the company went ahead and deposited a large cash amount on their side but the bank never got the memo they said I had no clue like I didn't know you got more money why didn't you tell us so that's what's going on there I want you to write that out so what happens is the bank needs to add that from their side so add to bank side and on this one up here you're gonna subtract from the bank side another big one is errors so this is gonna be the harder one I would say cuz you have to look at where the error took place was it on the bank side was it on the book side and if so what is it involved did they overpay did they under pay did they add more to their balance and they should have and so that's gonna be the hardest part and we'll go through errors in this big practice problem I'll show you how we do it but beware of that usually on problems they'll say like a check was issued for this amount but they recorded it here or the bank miss wrote the the deposit they wrote it for this much when it should have been this much etc and the idea is you want to look at the differences so the difference between correct amount and recorded them out so how much did they record it for but how much shouldn't have been recorded for etc that's very important those are some big rules here on this side so let me scroll down here to the next so how do we set it up so I went through some of the more important terms there's others but we'll go through the remaining of those in the problem but how do we set it up well basically what's going to happen is on the well do the bank side over here and then the book side over here book side just means the company side so with the bank side you're gonna take this balance whatever they started with the cash balance and you're gonna add in deposits in transit you're gonna also actually that's one of the bigger ones if there's any errors that's another thing that will be added it just depends on the air though so let's just say I'll say you'll add a bank error and only if that bank error understated the account move down a little bit so we can see more yeah understated so that makes sense right if they understated the balance you have to add back what you messed up then you're gonna subtract what we call outstanding checks we mentioned that and those are some of the bigger ones you'll see on the banks side and that's just gonna equal basically your adjusted balance and that's the balance we want to equal on both sides okay now over here on the books side it's there's some more but we're not gonna go through all of them so you start with your balance you'll add in any notes and interest so what happens there basically is that sometimes the bank will receive a payment from a customer or receive interest from customer and then they tell the book or the company they're like hey you just got some money from a customer make sure to add it to your books that's what's happening here you're gonna add in any air that understates so same as the bank side and then also you're gonna subtract any type of service fee sometimes the bank will give you a fee which we all hate fees but sometimes that happens so the book needs to get that memo to be like okay I need to subtract that and also you'll subtract any errors that overstate because if it overstates that balance we have to subtract it and that's gonna equal our adjusted balance so there actually is a few more items but I'm not going to go through all of them here but this is the main gist the main formula for each side now what we're gonna do now is we're gonna go and practice a problem using all this so let me scroll down here so this practice problem is large so it's taking up the entire wipe what I'll do is I'll go to another whiteboard that's more clear and I'll write everything out and I'll reference all the information over here this one's a long one so let's take a look Kovach corp reported a cash balance at the end of june of 24 567 however the bank's cash balance was 19 486 so that's important because now you can see the beginning balances were different on each side they need to reconcile the differences during June kovat issued two checks for one for 1345 that's check 906 and 907 was 4 2 5 6 6 so the bank has not heard of such checks that's a hint additionally COBIT had a large deposit from a customer for 12 1 to 7 the bank never got the memo that's a deposit there the bank reported a note collection in interest for 3 to 5 Oh also a service fee was applied for 25 bucks kovat had issued a additional check check 908 they had issued it for 870 but recorded it for 780 mmm interesting so the main thing here we got to do is prepare a bank rec there's a lot of numbers here so what I'm gonna do is I'm gonna jump to another whiteboard and I'm gonna reference this whiteboard with all the information so bank balance and book bounce so right here this is important so this is how you're gonna set it up to get down to your adjusted balance now the first thing we start with is the bank balance and that's just gonna be your cash balance right here and I'll put that on both sides so what was our balance let me scroll back her balance was twenty four five six seven for the book side in nineteen forty eight six for the bank twenty four five six seven for the book I think the other one was nineteen yeah nineteen 486 okay so that's where we start now from here we're gonna go ahead and add certain things we're just gonna start with the bank side now we know we're gonna out add any type of deposit and transit I always call it deposit for now let's try to find some if we have any so I saw a deposit right here kovat had a large deposit from a customer but the bank never got it so that's a deposit in transit the bank never did it's for twelve one two seven so write that in here now next was there any outstanding checks cuz that's important here I'll call it just outstanding I'll call it outstanding checks so let's go take a look well if you remember right here it said during June Kovan had two checks 906 thirteen four five nine and seven but the bank and not heard of it those are important so thirteen four five and two five six six so thirteen four five and two five six six so write those subtract those out now let's see any errors on the bank side this error down here I'll give you a hint is actually on the books side so we have to correct it there but there's no errors there's nothing else so all I see is this for the bank's side so let's go ahead and add it up here so equals and then now you're gonna take nineteen for eight six you're gonna add in twelve one two seven but you're gonna subtract 13 for 5 and subtract two five six six there we are so our final balance that we should get for the bank side is equal 2:27 702 that's important now let's tackle the book side so the book all I see for the book side we covered everything up here in this top section but I did notice that the bank reported no collection and interest for three to five Oh so we need to add that so add that in I'll call it in and I so note and interest and I just forgot the number three to five Oh so let's add that in here three to five oh now what else do we have so from the books side I did see there was a service fee so we have to subtract that fees suck that's 425 bucks let's subtract call it SF $25 there alright and let's see what else we have well there was that error when we're at the bottom here there was an additional check for 870 but recorded it for 780 so what happened here was that Cova just wrote it recorded it wrong it should have been for 870 a total cash outlay of 870 but they recorded it for 780 they mixed up the two numbers there so they didn't record it for enough it's not enough cash going down right it should have been 870 but they only recorded for 780 so they were off by looks like 90 bucks right 870 - 780 is 90 so they needed basically the India subtracts 90 more dollars from their cash balance to get it correct so let's do that - error for the difference which was $90 that's all I see here I put this there too let's go ahead and try it from the books site so you start with your balance of twenty four five six seven we add in our note that we got money for subtract 25 and then you subtract 90 and there we are final balance 27 702 and that's it let me Center this there we go so they are now reconciled the bank balance equals the book balance we went through you know what a bank reconciliation was the important term some of the bigger things that you'll see I went through how to set it up went through a huge practice problem here to make sure that both sides balance so hopefully that was helpful thanks again for watching and I'll see you in the next video

Channel: Accounting University

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Keywords: bank reconciliation accounting tutorial, bank reconciliation, bank reconciliation accounting, bank reconciliation tutorial financial accounting, bank reconciliation tutorial video, bank reconciliation tutorial, bank reconciliation statement tutorial, bank reconciliation statement, bank reconciliation statement accounting, bank reconciliation accounting example, bank statement tutorial, simply accounting bank reconciliation tutorial, accounting stuff, edspira, kristin ingram

Id: ORSak9kMpQA

Length: 16min 6sec (966 seconds)

Published: Fri Apr 03 2020