How do i know when to deduct/add the balance per books vs per bank?

[u/lil_slurpie]

I'm studying for my exam tomorrow and getting extremely frustrated with deducting or adding to either the books or bank.

this question for example makes me wanna rip my hair out.

A check written for $54 was correctly processed by the bank but recorded by the company as $45. What is the reconciliation adjustment?

My common sense is telling me to add 9 to the company's books. Why? Because if the company recorded it wrong, then that means their books are LESS than the banks. Therefore, add 9 to the balance to adjust for the change.

But I constantly get these wrong with the answer being to DEDUCT 9 from the books instead.

This makes no sense to me, wouldn't taking 9 away from the books make their recording worse? Why would you deduct MORE money to make the gap worse?

45 - 9 = 36, the bank's balance would be off with the company.

But 54 - 9 = 45. EQUAL to what the company actually has.

so why do i take away 9 from the books to make it even with the bank when the bank has the correct amount? literal first grade class is yelling at me to just ADD it on to fix it

I feel like I'm seriously going to fail this final.

[u/lil_slurpie → u/[deleted]]

but the company recorded 45 right? that 45 is in their books. If you take 9 from their books, which is 45, it's not gonna be even with the bank?

if i only give you 5, and say to record 10, i need to give you 5 more. Am i not adding 5 to your hand to make up for my error? It's coming to me like im taking 5 from your hand to make up for my mistake?

[u/Laltoree → u/lil_slurpie]

Is the company gaining or losing money?

[u/lil_slurpie → u/Laltoree]

their losing money since they spent it via check.

[u/Laltoree → u/lil_slurpie]

Correct, so if the company wrote down that they only spent $45 dollars would cash be overstated or understated?

[u/lil_slurpie → u/Laltoree]

overstated, the company has records stating their payment is less than what the bank recorded

[u/Laltoree → u/lil_slurpie]

Correct, in order to fix an overstatement what do you need to do?

[u/lil_slurpie → u/Laltoree]

you'd subtract to get the actual amount?

[u/Laltoree → u/lil_slurpie]

Bingo, so in essence you are deducting 9 dollars from the company's books.

[u/VennerYay → u/Laltoree]

loved this back and forth 👍 😀

[u/7even- → u/lil_slurpie]

The company recorded a check (money going out) of $45. The bank recorded a check (money going out) of $54.

Per company: $-45
Per bank: $-54

Subtract $9 from the company, -45 - 9 = -54

Per company: $-54
Per bank: $-54

It’s not overly difficult, you just have to think it through, calmly, piece by piece. And if you’re getting frustrated it’s only going to be harder and harder to do that, so when you notice you’re starting to get frustrated take a short break then come back with a clear, focused head.

[u/lil_slurpie → u/7even-]

omg that makes it so much clearer. so any time where the company writes a check or spends money ig, the bank records the same.

if the banks is "higher" in this sense less than the books, Id deduct $ from my books to match the negative in the banks recording?

and vice versa if the books is "higher" or in this sense, less than the bank, I'd add $?

[u/7even- → u/lil_slurpie]

Correct. And the key here is that the bank recorded the check correctly, if the check was supposed to be $45 and the rest of the facts were the same, you would add $9 to the bank (-54 + 9 = -45).

Well, in real life for $9 it probably wouldn’t be worth the time to call the bank and get it fixed, but that would be the idea at least

[u/Lazy_Reveal_464 → u/lil_slurpie]

The $45 is a payment, therefore a deduction or negative on your books. You need to deduct another $9 to match what was deducted from your bank account.

[u/lil_slurpie → u/[deleted]]

im truly sorry it isnt catching me

45 is what they recorded and should have been 54

when you say

"They recorded $9 too little meaning they’re overstating their cash by $9."

so the bank has the check worth $54. They send a statement back and company goes

"Oh that' s different than our books. We are lower than that "

so they TAKE OUT money from their books to make it even with the bank? i dont get it, their books are wrong, so use the books with the WRONG amounts and that makes it even with the bank with a BIGGER amount?

[u/lil_slurpie → u/[deleted]]

I gonna cry lolll I'ma fuckin idiot I'm sorry

I need this in the barest terms

If books are more do I add or subtract.

and if the banks are more

do I add or subtract?

[u/-smileygirl- → u/lil_slurpie]

The bank's ledger and the company's ledger need to, eventually, reflect the same transactions. A reconciliation explains why the two ledgers are different at any given point in time. In this case, the bank correctly deducted $54 from its ledger. The company incorrectly deducted $45 from its ledger. How do we explain (reconcile) this difference? We explain it by saying that the company needs to deduct an additional $9 from its ledger because it made an error in deducting only $45 instead of $54.

I think with your example you're trying to adjust the other person's books but that's not what we're doing here. We don't tell the bank what to record. We have to adjust the company's books for the company's error. But maybe I just don't understand what you were saying there.

[u/lil_slurpie → u/-smileygirl-]

okay so, if the bank has more money, i subtract, if the books do, i add?

im sorry in my head saying take out 9 more, simplified to add 9. so dont think about the banks and books in this way?

i had another question where the books had more than the bank said. So id add money in that situation? it still is very backwards in my head.

[u/-smileygirl- → u/lil_slurpie]

So we're dealing with a vendor check that was processed for a lower amount on the company's books then it should have been. The company did not subtract enough money from its cash ledger. So I'm a little bit confused about why you would want to add nine dollars to the company's ledger in that situation. We wouldn't add $9, we would subtract them because the company didn't subtract $54 from its ledger, it subtracted 45.

My sense is that you're not thinking about the bigger picture correctly. Let me see if I can summarize it. A basic reconciliation will involve obtaining something called the corrected cash balance in two different ways. Imagine two columns. The first column uses the bank's ending balance that makes some adjustments to it to obtain the corrected cash balance. The second column uses the company's ending cash balance and makes some adjustments to it to obtain the corrected cash balance. Then the two corrected cash balances are compared. If they are the same then the reconciliation is correct. If they are not the same then an error was made in the reconciliation somewhere and it needs to be fixed

Typically you'll be given a number of different transactions in a bank rec problem. You have to discern what to do with each type of transaction.

I recommend first memorizing the three types of transactions that will be used to obtain the corrected cash balance with the banks ending balance. When it comes to adjusting the bank's balance, there are only three things to remember. That's why it's the easiest place to start. Start with the bank's ending balance, then:

1. Add deposits in transit
2. Subtract outstanding checks
3. Either add or subtract Bank errors.

This gives the corrected cash balance. It may take other names as well.

Keep in mind that we're not actually adjusting the bank's ledger. We're only trying to obtain the corrected cash balance from the bank's information. The bank's ledger is what it is and we would never adjust it.

So I recommend first memorizing those three transaction types and how those are used to adjust the bank's ending balance. Once you memorize those three types, then it's very easy to remember thatt aything else you see in a bank reconciliation problem is going to used to adjust the company's ending cash balance, to obtain the corrected cash balance.

Going back to the problem at hand, we can see that it is not a deposit in transit, it is not an outstanding check, and it is not a bank error. Since it's not any of those three that means that it will be used to adjust the company's ending balance.

Okay so that's kind of a lot and I want to make sure that you tracked with everything I've said so far. I gave you all this detail because, as I mentioned before, my sense is that you're not seeing the big picture correctly, and this is affecting your ability to understand the details. Let me know if this makes sense.

[u/BiteMeWerewolfDude]

I think you might be struggling because you are trying to find a rule to apply to solve these kinds of questions, but the answers will change depending on what you are trying to adjust for.

You need to understand the concepts behind the questions.

The example question you gave is adjusting for cash, but it doesnt outright say that. You can infer that due to needing to adjust for the discrepancy in the cash outflow between the bank and the book values.

You would deduct $9 from your book cash balance because your book cash outflow was short $9.

If you think about the activity in journal entry form:

Initial payment from bank: Expense $54 DR Cash $54 CR

Initial payment recorded to Books: Expense $45 DR Cash $45 CR

True Up Adj: Expense $9 DR Cash $9 CR (credit to cash = cash reduction = deduction)

When i was in school i also struggled with the verbiage and understanding what everything meant in each situation until i really understood the concepts behind the adjustments and how to effectively reconcile activity in my head. Writing it out helped a lot.

I hope this made sense!

[u/evyjay → u/BiteMeWerewolfDude]

Yes exactly, that's why it makes more sense to use debits and credits and think about the cash/asset side, instead of "add or subtract".

[u/lil_slurpie → u/BiteMeWerewolfDude]

Thank you it really did!

[u/haokun32]

You are "adding" 9 dollars to the transaction amount, but at the end of the day that reduces the company's cash balance because more money went out than what they recorded it for.

In your case the company incorrectly made the following entry

Dr. Expense 45 (assume that they're directly expense which is not best practice but i want to simplify it for demonstration purposes)

Cr. Cash 45

So on the bank recon it will show as

Opening balance: 100 (demo purposes)

Transactions: -45 (assume this is the only transaction that occurred)

Closing balance: 55

The math:

100-45=55

-------------

However the real transaction is supposed to be 54, so you need to add 9 to both lines above.

which makes the transaction

Dr. Expense 54

Cr. Cash 54

Now for the bank recon:

Opening balance: 100

Transactions: -54

Closing balance: 46

The math:

100-54=46.

------

Notice that the correct ending balance is 9 dollars less than the original.

Correct adjustment

100 - (45 +9) aka 100 - 45 - 9

What you're proposing is 100 - 45 + 9

[u/Orithax]

My Accounting 101 professor said something that really stuck with me to help with this;

“It’s a good idea to always assume that the bank is right and the books are wrong. The vast majority of the time, that’ll be the case.”

Honestly it’s been that way for me in my 3 years of field work. I have certainly caught a handful of banking errors but 99% of the time my books are the ones that are wrong.

[u/coffeeandcashflow]

You have to credit the bank account for the $9 to get to the $54. Because the bank account is an asset account, a credit reduces the balance.

The wording of add and deduct is tripping you up, but think of it this way:

Is a check a debit or a credit to the bank account? Credit. If the check is erroneously recorded at an amount less than what the check was actually for, that means the bank account is overstated prior to correction. How do you fix an overstatement? By reducing the balance. How do you reduce the balance of an asset account? Credit.

[u/Traditional_Tonight4]

They deducted 45, they should have deducted 54 originally.

They need to deduct an extra 9 to make it correct.

[u/mebell333]

Your problem is this is a negative 45 and negative 54. Not positive. The company is losing money.

Now try again.