By Deanna Parmenter
This blog is the third of four in a series talking about basic accounting concepts that I frequently get asked about. By knowing how to reconcile your bank account, you may be able to reduce bounced check fees and reduce your risk of identity theft.
Why reconcile your bank accounts? This is how you know what happened to your money. By reconciling your bank account you can make sure that what you think you have in your checking account agrees with what the bank says you have. If money is tight, reconciling will help you spot fees that your bank may charge your account so you don’t bounce a check.You will also be able to quickly identify charges that are not legitimate.
If you find an error or have a question, banks allow you a certain number of days to alert them to the problem before you become liable for the error or incorrect charge. If you don’t notify the bank within that time frame you become liable for the amount, even if it’s wrong.
If you own a small business, monthly bank reconciliation is very important, as you need to verify income and expenses and you need to make sure that your employees are not stealing from you (sad, I know, but very common). It can be an overwhelming task, but this is how you stay on top of your profits and keep track of the checks you write.
Because I travel quite a bit, I personally like to pay my bills online and receive all of my bills and statements electronically. That way, I don’t have to worry about missing a payment because I wasn’t in town to receive the bill.
If you’ve never reconciled your bank accounts, ask a friend who knows how to do this well to help you. Never ignore your bank reconciliation, because if you don’t have a clear picture of how much money you have, you may be likely to blow any budget you have in place and overspend. This could cause problems such as bounced checks and fees for you and the people who you’ve written the checks to. If you’ve ever bounced a check, then you know how expensive it can be.
Whether you still write checks and mail them, or use online bill pay, reconciling your account is done the same way. The only difference is how often you can reconcile, but I recommend at least monthly if not online and weekly if you have online access to your account. Here are the basic steps to reconciling:
Update your check register with any transactions that appear on the bank statement (whether printed or online) that you did not previously record, including interest earned, service charges, etc.
In your checkbook, place a checkmark next to all checks paid, deposits credited, or bank credits/charges shown on the bank statement. Then, using the table below, list all outstanding checks and deposits (no check mark in your check register = not yet charged or credited to your account):
Now compare the bank statement to your checkbook.
What to do if your account doesn’t balance? Then begins the task of finding the problem. Here are a few tricks that may speed it up for you:
If the error can be divided by 9, then the problem is most likely a transposed number (i.e., you wrote “73” when you should have written “37”. The difference = 36, which can be divided by 9).
Did you record all of your debit card purchases? There is no check number to track, so keep all of your receipts in one place for easier reconciling.
Do you have automatic payments that are deducted from your account each month? Did you remember to record all of those payments?
Recording purchases but not subtracting them from the balance can lead to mistakes when carrying out your balance.
If you are sure you have recorded every credit and charge and still can’t find the problem, go back to the beginning of the month or to the point where the previous reconciliation stopped and check your math. Many common errors are caused by adding or subtracting incorrectly. For example, you wrote a check for $38.43 but you recorded the amount as $34.43 in your checkbook for a difference of $4.00.
HERE ARE SOME WEB SITES TO GET YOU STARTED
Performing Bank Reconciliations
Manual Bank Reconciliations
How to Balance a Checkbook
Sample Bank Reconciliation
Coming up in the last article in this series: Are You an Employee or an Independent Contractor?