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Bank Reconciliation Example: Step-by-Step | CPA Exam

In this video, we discuss an example for bank reconciliation. Accounting student or CPA Candidate? Start your free trial ✅https://farhatlectures.com/ Bank Reconciliation Bank reconciliation is the process of comparing a company's internal financial records with its bank statement to identify discrepancies and ensure accuracy in the accounting records. It helps detect errors, omissions, and potential fraud, providing a complete and accurate view of cash balances. Purpose of Bank Reconciliation: Accuracy: Ensures that cash records match the bank statement, preventing misstatements. Fraud Prevention: Identifies unauthorized transactions, discrepancies, and potential fraud. Cash Flow Management: Verifies the actual cash position to make informed financial decisions. Components of a Bank Reconciliation: Bank Statement Balance: The ending balance reported by the bank, including all cleared transactions. Book Balance (Cash Account Balance): The cash balance per the company's accounting records. Adjustments to the Bank Statement: Add: Deposits in transit (deposits not yet recorded by the bank) Subtract: Outstanding checks (checks issued but not yet cleared by the bank) Adjustments to the Book Balance: Add: Bank collections, interest earned, and direct deposits Subtract: Bank fees, service charges, NSF checks, and errors Steps in Preparing a Bank Reconciliation: Compare Bank Statement with Cash Ledger: Match transactions in the bank statement with the cash account in the ledger. Identify Unrecorded Transactions: Include items like bank fees, interest income, and NSF checks that may not yet be recorded. Adjust the Bank Statement Balance: Adjust for deposits in transit and outstanding checks. Adjust the Book Balance: Record bank fees, NSF checks, and any other bank transactions not yet recorded. Reconcile and Ensure Both Balances Match: After adjustments, the bank balance and book balance should be equal. Example of Bank Reconciliation: Assume a company’s cash account shows a balance of $5,000, and the bank statement shows $6,000. The following discrepancies are identified: Outstanding Checks: $1,200 Deposits in Transit: $500 Bank Fees: $100 NSF Check: $200 Adjustments to the Bank Statement Balance: Bank Statement Balance: $6,000 Less: Outstanding Checks: ($1,200) Add: Deposits in Transit: $500 Adjusted Bank Balance: $5,300 Adjustments to the Book Balance: Book Balance: $5,000 Less: Bank Fees: ($100) Less: NSF Check: ($200) Adjusted Book Balance: $5,300 Both the adjusted bank balance and book balance now match, confirming the reconciliation. Importance of Bank Reconciliation: Financial Accuracy: Prevents errors and ensures accurate financial reporting. Fraud Detection: Identifies unauthorized transactions and discrepancies. Cash Flow Management: Provides a clear view of available cash for budgeting and planning. Conclusion: Bank reconciliation is a critical internal control procedure that ensures the accuracy of cash records, detects errors, and safeguards against fraud. Regular reconciliation helps maintain financial integrity and provides a comprehensive view of cash balances for effective cash management. #cpaexam #accounting #accountingandfinance