{"id":149,"date":"2024-09-06T16:46:54","date_gmt":"2024-09-06T16:46:54","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/introduction-to-preparing-a-bank-reconciliation\/"},"modified":"2024-09-06T16:46:54","modified_gmt":"2024-09-06T16:46:54","slug":"introduction-to-preparing-a-bank-reconciliation","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/financialaccounting\/chapter\/introduction-to-preparing-a-bank-reconciliation\/","title":{"raw":"Introduction to Preparing a Bank Reconciliation","rendered":"Introduction to Preparing a Bank Reconciliation"},"content":{"raw":"\n<h2>What you'll learn to do:&nbsp;Recognize the significance of the bank reconciliation as an internal control<\/h2>\nMost companies use checking accounts to handle their cash transactions. The company deposits its cash receipts in a bank checking account and writes checks to pay its bills. Keep in mind\u2014a bank account is an asset to the company BUT to the bank, your account is a liability because the bank owes the money in your bank account to you. For this reason, in your bank account, deposits are credits (remember, liabilities increase with a credit) and checks and other reductions are debits (liabilities decrease with a debit).\n\nFor example, here\u2019s the first transaction from NeatNiks\u2019s from the company perspective:\n\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09063236\/Screen-Shot-2020-11-08-at-10.19.37-PM.png\"><img class=\"alignnone wp-image-5386\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09063236\/Screen-Shot-2020-11-08-at-10.19.37-PM-300x141.png\" alt=\"Two T accounts side by side. On the left is a checking account with a debit balance carried forward of 0 dollars. There is also a debit entry of 20,000 dollars. There is an ending balance of 20,000 dollars. On the right side is the Owner's Capital account. It has a balance carried forward of 0 dollars and a credit entry of 20,000 dollars. It has an ending credit total of 20,000 dollars.\" width=\"581\" height=\"273\"><\/a>\n\n<span style=\"font-size: 1rem; text-align: initial;\">Here\u2019s the same transaction as recorded by the bank:<\/span>\n\n<a style=\"font-size: 1rem; text-align: initial;\" href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09064337\/Screen-Shot-2020-11-08-at-10.19.44-PM.png\"><img class=\"alignnone wp-image-5387\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09064337\/Screen-Shot-2020-11-08-at-10.19.44-PM-300x144.png\" alt=\"Two T accounts side by side. On the left is the Cash reserves account. It has a debit balance carried forward of 50,000,000 dollars. There's a debit entry of 20,000 dollars. There is an ending debit balance of 50,020,000 dollars. On the right side is the Due to NeatNiks account. Its balance carried forward is 0 dollars and there is also a credit entry of 20,000 dollars. The ending credit balance is 20,000 dollars.\" width=\"590\" height=\"283\"><\/a>\n\nNeatNiks\u2019s demand deposit (checking account) is a liability to the bank. If Nick Frank spends $150 at Home Depot using the business debit card, the bank will make the following entry when it sends the payment to Home Depot on your behalf:\n\n<a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09065040\/Screen-Shot-2020-11-08-at-10.19.50-PM.png\"><img class=\"alignnone wp-image-5388\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09065040\/Screen-Shot-2020-11-08-at-10.19.50-PM-300x133.png\" alt=\"Two T accounts side by side. On the left is the Cash reserves account. It has a debit balance carried forward of 50,000,000 dollars. There's a debit entry of 20,000 dollars. There is also a credit entry of 150 dollars, leaving an ending debit balance of 50,019,850 dollars. On the right side is the Due to NeatNiks account. Its balance carried forward is 0 dollars and there is also a credit entry of 20,000 dollars. It has a debit entry of 150 dollars. The ending credit balance is 19,850 dollars.\" width=\"591\" height=\"262\"><\/a>\n\n<span style=\"font-size: 1rem; text-align: initial;\">That\u2019s why it\u2019s called a debit card. Because the bank debits your account when you use it.<\/span>\n\nThe bank sends the company a statement each month that is really just a printout of the bank\u2019s ledger for your account, which is really a subsidiary ledger because the bank doesn\u2019t have a general ledger (GL) account for every depositor. The company checks this statement against its records to determine if it must make any corrections or adjustments in either the company\u2019s balance or the bank\u2019s balance. A bank reconciliation is a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the bank statement and the cash balance on the company\u2019s books. The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the cash balance in the ledger.\n\nAnd that is the main internal control for our \u201ccash\u201d accounts. If the owner of the coffee shop had simply used a basic internal control, she would have noticed that the deposits being recorded by the bank were different (smaller than) the ones being recorded in the company\u2019s records, unless the thief was somehow able to manipulate the cash register and other sales records.\n","rendered":"<h2>What you&#8217;ll learn to do:&nbsp;Recognize the significance of the bank reconciliation as an internal control<\/h2>\n<p>Most companies use checking accounts to handle their cash transactions. The company deposits its cash receipts in a bank checking account and writes checks to pay its bills. Keep in mind\u2014a bank account is an asset to the company BUT to the bank, your account is a liability because the bank owes the money in your bank account to you. For this reason, in your bank account, deposits are credits (remember, liabilities increase with a credit) and checks and other reductions are debits (liabilities decrease with a debit).<\/p>\n<p>For example, here\u2019s the first transaction from NeatNiks\u2019s from the company perspective:<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09063236\/Screen-Shot-2020-11-08-at-10.19.37-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5386\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09063236\/Screen-Shot-2020-11-08-at-10.19.37-PM-300x141.png\" alt=\"Two T accounts side by side. On the left is a checking account with a debit balance carried forward of 0 dollars. There is also a debit entry of 20,000 dollars. There is an ending balance of 20,000 dollars. On the right side is the Owner's Capital account. It has a balance carried forward of 0 dollars and a credit entry of 20,000 dollars. It has an ending credit total of 20,000 dollars.\" width=\"581\" height=\"273\" \/><\/a><\/p>\n<p><span style=\"font-size: 1rem; text-align: initial;\">Here\u2019s the same transaction as recorded by the bank:<\/span><\/p>\n<p><a style=\"font-size: 1rem; text-align: initial;\" href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09064337\/Screen-Shot-2020-11-08-at-10.19.44-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5387\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09064337\/Screen-Shot-2020-11-08-at-10.19.44-PM-300x144.png\" alt=\"Two T accounts side by side. On the left is the Cash reserves account. It has a debit balance carried forward of 50,000,000 dollars. There's a debit entry of 20,000 dollars. There is an ending debit balance of 50,020,000 dollars. On the right side is the Due to NeatNiks account. Its balance carried forward is 0 dollars and there is also a credit entry of 20,000 dollars. The ending credit balance is 20,000 dollars.\" width=\"590\" height=\"283\" \/><\/a><\/p>\n<p>NeatNiks\u2019s demand deposit (checking account) is a liability to the bank. If Nick Frank spends $150 at Home Depot using the business debit card, the bank will make the following entry when it sends the payment to Home Depot on your behalf:<\/p>\n<p><a href=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09065040\/Screen-Shot-2020-11-08-at-10.19.50-PM.png\"><img loading=\"lazy\" decoding=\"async\" class=\"alignnone wp-image-5388\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/5107\/2020\/10\/09065040\/Screen-Shot-2020-11-08-at-10.19.50-PM-300x133.png\" alt=\"Two T accounts side by side. On the left is the Cash reserves account. It has a debit balance carried forward of 50,000,000 dollars. There's a debit entry of 20,000 dollars. There is also a credit entry of 150 dollars, leaving an ending debit balance of 50,019,850 dollars. On the right side is the Due to NeatNiks account. Its balance carried forward is 0 dollars and there is also a credit entry of 20,000 dollars. It has a debit entry of 150 dollars. The ending credit balance is 19,850 dollars.\" width=\"591\" height=\"262\" \/><\/a><\/p>\n<p><span style=\"font-size: 1rem; text-align: initial;\">That\u2019s why it\u2019s called a debit card. Because the bank debits your account when you use it.<\/span><\/p>\n<p>The bank sends the company a statement each month that is really just a printout of the bank\u2019s ledger for your account, which is really a subsidiary ledger because the bank doesn\u2019t have a general ledger (GL) account for every depositor. The company checks this statement against its records to determine if it must make any corrections or adjustments in either the company\u2019s balance or the bank\u2019s balance. A bank reconciliation is a schedule the company (depositor) prepares to reconcile, or explain, the difference between the cash balance on the bank statement and the cash balance on the company\u2019s books. The company prepares a bank reconciliation to determine its actual cash balance and prepare any entries to correct the cash balance in the ledger.<\/p>\n<p>And that is the main internal control for our \u201ccash\u201d accounts. If the owner of the coffee shop had simply used a basic internal control, she would have noticed that the deposits being recorded by the bank were different (smaller than) the ones being recorded in the company\u2019s records, unless the thief was somehow able to manipulate the cash register and other sales records.<\/p>\n","protected":false},"author":6,"menu_order":10,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Introduction to Preparing a Bank Reconciliation\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective\",\"author\":\"James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University\",\"organization\":\"Endeavour International Corporation\",\"url\":\"\",\"project\":\"The Global Text Project\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":139,"module-header":"","content_attributions":[{"type":"original","description":"Introduction to Preparing a Bank Reconciliation","author":"Joseph Cooke","organization":"Lumen Learning","url":"","project":"","license":"cc-by","license_terms":""},{"type":"cc","description":"Accounting Principles: A Business Perspective","author":"James Don Edwards, University of Georgia & Roger H. 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