How To Do A Bank Reconciliation (EASY WAY)
TLDRIn this informative video, James from Accounting Stuff demystifies the process of bank reconciliation, breaking it down into seven manageable steps. He explains the importance of reconciling the bank statement and cash book to ensure accurate financial records and calculate the true cash balance. The video covers common reasons for discrepancies, such as omissions, timing differences, and errors, and provides a practical guide on how to identify and adjust these differences. By following these steps, viewers can confidently prepare a bank reconciliation, update their general ledger, and maintain the integrity of their financial statements.
Takeaways
- ๐ Bank reconciliation is the process of aligning the bank statement with the cash book to ensure they agree and reflect the true cash balance.
- ๐ค Differences between the bank statement and cash book can arise due to omissions, timing differences, and errors, which need to be identified and corrected.
- ๐ The bank statement is a record of transactions as perceived by the bank, while the cash book is maintained by the business and records its perception of bank balances and cash flows.
- ๐ Businesses typically perform bank reconciliations monthly, but frequency can vary based on the volume of transactions and business needs.
- ๐ ๏ธ The seven steps to bank reconciliation include: obtaining bank statement and cash book, setting up a reconciliation template, ticking matching transactions, adjusting bank statement balance, adjusting cash book balance, ensuring adjusted totals match, and preparing journal entries.
- ๐ผ The purpose of bank reconciliation is to correct the cash book, update the general ledger, and calculate the accurate 'true cash balance' of the business.
- ๐จ Omissions in the cash book might include missing receipts, interest received, bank fees, and bounced cheques which were not recorded by the business but appeared on the bank statement.
- ๐ Timing differences occur when transactions are recorded in different periods in the bank statement and cash book, such as deposits in transit and outstanding cheques.
- ๐ Journal entries are prepared at the end of the reconciliation process to correct any discrepancies and update the cash book to reflect the true cash balance.
- ๐ The adjusted bank balance and adjusted cash book balance should match at the end of the reconciliation process, confirming that all transactions have been accurately recorded.
Q & A
What is the primary purpose of bank reconciliation?
-The primary purpose of bank reconciliation is to ensure that the business's books are up to date and provide an accurate picture of the financial situation by identifying and correcting any discrepancies between the bank statement and the cash book.
What are the three main reasons for differences between the bank statement and cash book?
-The three main reasons for differences are omissions, timing differences, and errors. Omissions are transactions that appear on the bank statement but not in the cash book. Timing differences are transactions recorded in different periods in the two documents. Errors are mistakes made by either the bank or the business's accountant or bookkeeper.
What is the 'True Cash Balance' and why is it important?
-The 'True Cash Balance' is the accurate cash balance of a business after all outstanding cheques and deposits have cleared the bank. It is important because it provides a clear picture of the actual available cash, which is crucial for financial planning and decision-making.
How often should a business perform bank reconciliations?
-The frequency of bank reconciliations depends on the business. Most businesses perform them monthly, while larger companies with many transactions might do it weekly or daily. Smaller companies with fewer transactions might reconcile once every six months.
What is the first step in preparing a bank reconciliation?
-The first step is to obtain copies of the bank statement and cash book for the period that needs to be reconciled.
What is the role of the bank statement in the reconciliation process?
-The bank statement, provided by the bank, lists all the cash receipts and withdrawals that the bank records as having been made by the business over a specific period. It serves as one of the two primary documents to be compared and reconciled with the cash book.
What is the adjusted cash book balance?
-The adjusted cash book balance is the cash book balance after accounting for omissions, correcting errors made by the accountant or bookkeeper, and considering deposits in transit and outstanding cheques.
What is the final step in the bank reconciliation process?
-The final step is to prepare the necessary journal entries to correct the cash balance in the current month's general ledger, ensuring that the adjusted bank balance and adjusted cash book balance match exactly.
How can a business identify omissions in the cash book during reconciliation?
-Omissions can be identified by comparing the bank statement to the cash book and looking for transactions that appear in the bank statement but are not recorded in the cash book, such as missing receipts, interest received, bank fees, and bounced cheques.
What is the significance of matching transactions between the bank statement and cash book?
-Matching transactions helps to identify which transactions are already in agreement and do not need to be included in the reconciliation process. This simplifies the task of identifying and correcting discrepancies.
What should a business do if the adjusted bank balance and cash book balance do not match after completing the reconciliation steps?
-If the adjusted balances do not match, it indicates that there is an error in the reconciliation process. The business should review all steps carefully to identify and correct the error before finalizing the reconciliation.
Outlines
๐ Introduction to Bank Reconciliation
The video begins with the host, James, introducing the topic of Bank Reconciliation. He explains that the video will teach viewers how to reconcile the bank statement to the cash book in seven simple steps. James shares his experience as an auditor and expresses his intention to make the process easy to understand. The video is part of a series on Accounting Basics, and he encourages viewers to subscribe for more content. He starts by defining a bank statement and a cash book, explaining the common discrepancies between them, and the purpose of bank reconciliation.
๐ Understanding Discrepancies and Reconciliation Steps
James delves into the reasons why a bank statement and a cash book might not agree. He outlines three main reasons for these discrepancies: omissions, timing differences, and errors. Omissions refer to transactions that appear on the bank statement but not on the cash book, such as missing receipts or bank fees. Timing differences arise when transactions are recorded in different periods, such as deposits in transit or outstanding cheques. Errors can be made by the bank or the business's accountant or bookkeeper. James then explains the purpose of bank reconciliation, which is to identify and correct these discrepancies to ensure the business's books are accurate and to calculate the true cash balance.
๐ Step-by-Step Bank Reconciliation Example
James uses the example of a fictional company, Chudley Cannons Inc., to illustrate the bank reconciliation process. He explains how to obtain copies of the bank statement and cash book, and how to set up a bank reconciliation template. The video then walks through the steps of ticking off matching transactions, calculating the adjusted bank statement balance, and identifying and adjusting for omissions, timing differences, and errors in both the bank statement and cash book. James emphasizes the importance of these steps in arriving at the true cash balance and preparing necessary journal entries to update the general ledger.
๐ Completing the Bank Reconciliation and Journal Entries
In the final part of the video, James completes the bank reconciliation process by checking that the adjusted totals match and preparing the necessary journal entries. He explains that while timing differences on the bank statement side do not require journal entries, adjustments affecting the cash book do. James provides a detailed explanation of how to record each journal entry, including missing receipts, interest received, bank fees, bounced cheques, and correcting errors. He emphasizes the importance of posting these journal entries to avoid repeating adjustments in future bank reconciliations. The video concludes with James summarizing the seven steps and encouraging viewers to apply them in their own bank reconciliations.
Mindmap
Keywords
๐กBank Reconciliation
๐กBank Statement
๐กCash Book
๐กOmissions
๐กTiming Differences
๐กErrors
๐กAdjusted Closing Balances
๐กJournal Entries
๐กTrue Cash Balance
๐กGeneral Ledger
Highlights
The video provides a comprehensive guide on how to reconcile a bank statement to the cash book in seven simple steps.
Bank reconciliation is essential for ensuring that business books are up to date and accurately reflect the financial situation.
The process identifies omissions, timing differences, and errors between the bank statement and the cash book.
Omissions in the cash book could include missing receipts, interest received, bank fees, and bounced cheques.
Timing differences arise from transactions recorded in different periods, such as deposits in transit and outstanding cheques.
Errors can be made by either the bank or the accountant preparing the cash book.
Bank reconciliation helps in calculating the 'true cash balance' of a business, which is the amount available after all transactions have been processed by the bank.
Businesses typically prepare bank reconciliations on a monthly basis, but the frequency can vary based on the volume of transactions.
The first step in bank reconciliation is to obtain copies of the bank statement and cash book for the period in question.
The bank reconciliation template should be set up with the unadjusted closing balances from both the bank statement and the cash book.
Matching transactions between the bank statement and cash book are ticked off to exclude them from the reconciliation process.
The adjusted bank statement balance is calculated by adding deposits in transit and deducting outstanding cheques.
The adjusted cash book balance is determined by accounting for omissions and correcting errors made by the accountant or bookkeeper.
The final step involves preparing the necessary journal entries to update the cash balance in the general ledger.
The video uses an example company, Chudley Cannons Inc., to illustrate the bank reconciliation process.
The presenter, James, shares his experience as an auditor to provide an effective approach to bank reconciliation.
Transcripts
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