Bank Reconciliation:Bank Column

Brian Krogol
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Alright, so a great internal control over cash is the use of a bank reconciliation. This is where the company literally takes the monthly bank statement that they get from the bank and they check it to the company's records and make sure that everything's okay between the two. Alright, let's check it out. So cash. Well, cash is the most liquid asset, right? When we talk about liquidity. Well, liquidity is like how can how quickly can it be converted to cash? Well, cash is already cash, so it's so liquid, it's so easy to steal. Right? Anyone who has their hands who gets their hands on the cash might have an incentive to actually steal it. So we're gonna need specific internal controls over cash. And one is the bank reconciliation. Okay. Like I said, this is where we compare the bank statement that we get every month to the company records. Okay. But what we're going to notice is that the bank statement isn't, that is generally not gonna be the same as what we see in our company records and this difference is due to a time lag. Okay, So if you think about it right now for a company that's current, you know, constantly like receiving money from customers buying stuff, you know, having all sorts of expenses, there's all sorts of activity in the account. Well, if we were to stop at a certain point of time, you wouldn't there would still be things that hadn't been processed on either end, Right? So you could think about it, you know, maybe back in the day, you would get a check on payday and it wouldn't clear directly. Right? You'd have to go to the bank and deposit it and then have to wait for it to clear. Right? So, I think there's this time lag right. You might have recorded something on your books that the bank hasn't recorded yet, or the bank might have recorded something that you didn't know about until you go the monthly bank statement. So, let's see how this bank reconciliation works. The goal of the bank reconciliation is to get to an adjusted balance. We're gonna have some number from the bank that that's the number of the amount of cash in our bank account as of that date. And we're gonna have our accounting records that show us some amount as well. And we're gonna adjust those numbers for different items to end up at the same number on both both accounts. Okay? So, let's start with the bank column of the reconciliation. Okay? So this is when there's events recorded by the company. So, we recorded stuff by the company, but the bank does not before the bank records it. Okay? So, the company made some sort of record, but the bank hasn't made that record. So, let's see what these are. First. We have deposits in transit. Ok. So deposited in transit. This is where the company had received a check. So think about the customer had mailed a check to the company. The company received the check and they're like sweet. We got this money and they made an entry. Okay? We received cash. Credit accounts receivable, right? We got money from a customer and then they go deposited in the bank. But the bank hasn't cleared the check yet. Right. Maybe we're at that point in time where we're waiting for that check to clear. Okay? So that means that that deposit that we put on our books, right? We increase the cash balance on our books. Well, the bank hasn't increased its balance yet for those deposits. So what we need to do is add the deposits in transit to the bank side of the reconciliation. Okay. So that means that we recorded it on our books, but the bank has not recorded it yet. The opposite is an outstanding check. This is where we received an invoice from a supplier and we wrote a check right? So we wrote a check to say, okay, we're gonna pay the supplier. So we wrote that check and we made a journal entry to decrease our cash, right? Because we're gonna pay cash to our supplier. So we decreased our cash. But at this point in time that check hasn't cleared yet. Right? But maybe the supplier hasn't hasn't deposited in their account yet. Maybe the banks still waiting to clear it for whatever reason. The bank balance does not show that we pay this check yet. So we need to subtract this amount from the bank balance to make sure that we're getting to the correct adjusted balance and the last one for banks. So those are the two big ones. You're pretty much always gonna see deposits in transit and outstanding checks when you do a bank reconciliation. Those are like the two biggest ones. And just remember that those are always on the bank side of the reconciliation. There's nothing that's going to be done on the book side for those. Okay, the last one here is bank errors. Okay this they just love to make errors, especially In accounting problems. Um they love to make an error at the bank or on the books. They love to do it. So what we have to do is remove the effects of the air. Alright. Unfortunately this could kind of be anything. This is usually something where like they switch switch the numbers, oh they were supposed to make $150 payment but they made a $510 payment, right? Something like that is usually how these things work. Okay, so that's the bank side of the reconciliation. Let's pause and then we'll go over the book side of the reconciliation