[Hopefulcpa1234]

Hi everyone,

I feel as though this should be an easy topic, but I am really struggling to understand bank reconciliations. Is there a uniform way to attack these problems? Do you start with the bank balance or the book balance? I am just pretty lost. Thank you in advance

[Warrior]

It is everyone's favorite part of accouting. Think of it as your own bank account.
For example, you know that you should have $1000. When you open your on-line bank you see that your $50 payment to conedison is pending, your $300 paycheck is outstanding, and the bank charged you $5 for services. Thus, $1000+50-300-5=$745

[TheeAccountant]

The reconciliation is to add or subtract the differences to make the book balance match the bank balance. You need to know which items go on the book and which items go on the bank, and then when you do all the adding and subtracting, each side will match. It doesn't matter which side you start with.

For the book side, you're going to add any interest and subtract any bank fees, including NSF fees, as you haven't recorded them yet. If you deposited a check and it was bad/bounced, you'll have to subtract it from the book as well, as it didn't go through.

For the bank side, you're going to add any deposits in transit that haven't hit the bank yet (you've recorded them on your books) and then you're going to subtract any outstanding checks (you've already subtracted them on your books).

In the end, each side matches. I love bank recs because you know if you did them right, because both sides have identical number to the penny.

[Silent]

balance bank statement
+deposit in transit
+cash on hand
-outstanding checks
+/- error by bank

your books
+interest earned from your bank
+note collected by your bank
-service charge from your bank
-NSF checks(checks that bounced because your client didn't have enough money to cover the check)
+/- error you made while recording a check
basically anything that is on the books of bank only goes to your book, and anything that is on your book and bank doesn't know about it, goes on the bank books.

[Ajar]

@Silent really like your easy to follow steps btw!

@Hopefulcpa1234 At least for practice sims, my plan of attack was to look at some of the choices that we could put in the boxes (i.e. a check error, interest earned, etc) and see if I could find them on the bank statement and/or the cash transactions per the GL (depending what the SIM was). If I found one, I'd write it down (it helped cut down the amount of “junk”) and then from there its just a a matter of following the formulas (like @silent wrote above).

For MCQs- looks for booby traps and isolate those out. If you're being asked to go from Bank to Book- try and think about some of the reconciling items from the bank's POV. When a bank is gonna give you your statement it's not going to be a “draft”, they're already going to have charged a fee, already added in any interest, and already included (and rejected) NSF checks, and corrected any mistakes from your end (i.e. transposed checks) before giving you a statement. When I first started doing MCQs for going from bank to book, my mistake was always including a clerical recording error from the company's POV (even though the bank had already corrected it for me).

Hope that helps!

[Ajar]

Here's a relatively simple problem and one way to approach it. It's an MCQ from my review course, but I'm excluding answers because you never know if it'll show up as a SIM on the real deal!

Philipp Co.’s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:

Bank Service Charge $10
Insufficient Funds Check $650
Outstanding Checks $1,500
Deposits in transit $350

Check deposited by Philipp and cleared by the bank for $125, but improperly recorded by Philipp as $152.

What is the net cash balance per books after the reconciliation?

1. You'll start with $54,200 as your beginning amount.
2. Look for the distracting info and get rid of that.

2A- The Bank Service Charge of $10 is a distraction. You don't need to include that because again, why would a bank ever give you your statement at the end of the month without including that. Its already on the statement and if you include it in your reconciliation calculation you'll be double counting.
2B- Insufficient funds check (NSF Check) of $650 is a distraction. Think about what you do in the real world. If someone ever gave you an NSF check, what's the only you know it bounced? By trying to deposit it at the bank! So, on the bank statement your ending balance will already include the NSF amount. If you include it in your reconciliation calculation you'll be double counting.
2C- The transposed check says “it cleared the bank” for the correct amount. The bank processed it for the correct amount, it was you that made the mistake of recording it. Your GL balance will be off, but your bank statement is correct. If you include it in your reconciliation calculation you'll be double counting.

We've now gotten rid of the distracting information. That leaves us with:

3. Outstanding checks (1500)- The bank has no way of knowing what checks are outstanding. However, you do (since you wrote them!). So…again from the banks POV, they don't know you have outstanding checks. Therefore to arrive at your cash balance you need to subtract the amount.
4. Deposits in transit +350- Again, the bank has no way of knowing you're depositing money in (until it clears). Because it's in transit, you know that you've deposited some funds, but the bank doesn't know yet. Therefore to arrive at your cash balance you need to add in deposits in transit.

you should get $53,050 as your answer

[PC]

This underscores how crucial work experience can be to passing these tests. I remember training my first week in public accounting and almost being brought to tears because I also couldn't grasp the bank rec concept. The trainer just smiled at me and said “give it a year; you'll be an expert and the concept will bore you.”

[jd]

This is can be a difficult concept to some, it definitely was for me. This may not sound like good advice, but memorizing the table of additions/subtractions to book/bank balance first helped me UNDERSTAND. Sometimes, memorizing isn't a bad thing when first approaching a concept. Thankfully, bank recon is one practice that I can almost guarantee you will actually use in your professional career.

[Earla Riopel (NYCARE)]

Great bank reconciliation from my last term professor: https://youtu.be/mQwJtOA8gkg
Good luck.

[Author]

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