Is this an “old-fashioned” idea? Perhaps it is in today’s age of electronic banking, when many people don’t even remember in what drawer they stuck their checkbook and register. For good cash management and to avoid the fees banks are more than willing to charge you for an overdraft, it is an excellent monthly habit to develop for both you and the younger people in your life. Don’t wait for the $30 overdraft charge to hit, because your debit card let you charge at the drugstore. The “balance check” feature may indicate you have $100 in your account; however, it will not tell you that there is still an outstanding check for $110 waiting to be cashed.
A bank reconciliation should be prepared each month when you receive your bank statement to verify the actual amount of cash in your account.
The balance in your check register will rarely agree with the balance shown on the bank statement because of the delay in checks and deposits clearing the account, automatic withdrawals you have not recorded, bank service charges, and possible errors you may have made in your register. By reconciling the records of the bank against your check register, you will result in having an accurate cash balance in your bank account.
Your bank will prepare a monthly bank statement indicating the date range of the period, the beginning and ending cash balance for the period, and the deposits and the checks that cleared within the period. It is very important to understand that the transactions shown on the bank statement will represent the items presented to the bank during the period and not what was issued. There is a delay from when you issue a check, make a deposit, or make a purchase with your bank debit card to when these transactions will actually appear in your bank account. This is also true for any bank account balances you receive through your ATM (Automatic Teller Machine) card receipts.
As you issue checks, make purchases with your bank debit card, make ATM withdrawals and deposits, enter each transaction in your check register. If you have any automatic withdrawals electronically taken from you account, enter these transactions in your check register at the appropriate time within the month. If your bank account has monthly service charges, enter these charges in your check register at the appropriate time within the month.
Each entry should reference the date, the payee and the amount of the transaction. For each entry, add or subtract the amount of the transaction from your bank balance. Most importantly, enter all the transactions!
Enter a check mark beside each deposit in your check register that was processed by the bank within the period and shown on the bank statement in the deposits section. Deposits on bank statements are also referred to as Credits.
Make a list of any deposits that were entered in your check register and did not appear on the bank statement. Add and total these deposits. These deposits should be at the end of the period or after the period ended and are known as “In Transit.” This means the deposits did not clear your account before the banking period ended. These deposits in transit should appear on the bank statement in the following period.
If you have deposits in your check register with dates prior to the last deposit shown on the bank statement that did not appear on the bank statement, you will want to contact your bank. This will mean the deposit that you recorded did not go into your bank account and could possibly mean there is a bank error.
Checks, ATM Withdrawals, Bank Debit Card Transactions or Automatic Electronic Payments
Enter a check mark beside each check, automatic electronic payments, ATM withdrawals or bank debit card transactions in your check register that was processed by the bank within the period and shown on the bank statement in the checks section. Checks on bank statements are also referred to as “Debits” or “Withdrawals.”
Make a list of any checks, automatic electronic payments, ATM withdrawals or bank debit card transactions that were entered in your check register and did not appear on the bank statement. Add and total these transactions. These transactions should be at the end of the period or after the period ended and are known as “In Transit.” This means the transactions did not clear your account before the banking period ended and should appear on the bank statement in the following period.
Use the following formula to reconcile your check register to the bank statement:
1. Enter the Ending Balance shown on your statement: _________
2. Enter the total deposits in transit from step two: _________
3. Add lines 1 and 2: _________
4. Enter the total checks/withdrawals in transit from step four: _________
5. Subtract line 4 from line 3. This is your reconciled balance and should agree with the balance in your check register: _________
You will want to do your bank reconciliation when it is quiet and when you are fresh. If your check register balance does not agree with your reconciled balance on line 5 of the formula, do the following:
- Recheck all math in all steps and the formula.
- Carefully recheck each transaction on the bank statement against the check register to make sure that the exact amount that was written in the check register is the amount that cleared on the bank statement.
- Subtract the reconciled balance from the check register balance. If the variance amount is equally divisible by 9, there is probably a transposing error in the check register, steps or formula. For example, a check may be written as $9.69 in the check register and actually cleared the bank as $9.96. This is a variance of $.27, which can be divided evenly by the number 9.
- Check your bank statement carefully for any transactions that cleared the bank and were not written in your check register. Enter these transactions in the check register and correct the balance.
- After trying tips 1 through 4, you may want to consider taking your records to the bank. The customer service department of your bank will assist you with the bank reconciliation.
Preparing bank reconciliations will ensure you maintain an accurate bank balance but will also catch bank errors that occasionally occur. Take control with the first step of cash management—reconcile your bank account! For more information regarding this topic or any other tax-related issue, contact Henssler Financial at 770-429-9166 or [email protected].