Bank reconciliation is comparing the transactions you document against the statement provided by your bank.
This is the same as balancing your checkbook. For this post, I am referring to it as bank reconciliation.
The purpose of the bank reconciliation
The importance of bank reconciliation is to basically make sure that all activity is accounted for and accurate. Here are a few reasons why it is important to reconcile your bank account regularly.
Catch and correct errors
The main purpose of performing a bank reconciliation is to catch and correct any errors. Nobody is perfect and errors will occur. It does not matter how diligent you are, I guarantee you will make at least one mistake.
If you do not catch and correct the mistake then your available balance in your check register will be wrong which can cause huge headaches down the road.
Notice unusual activity
If there is any unusual activity or charges you did not authorize or that you forgot about…you know those dreaded memberships you do not use…they will most likely show up on your bank statement and not your check register.
When you notice these charges you can take action. Have the fraudulent charges removed, and cancel the memberships you do not use. Or, at the very least remind yourself to add them to your check register so your available balance is more accurate.
Accurate available balance
Once your account is reconciled your available balance in your check register will be accurate. Therefore, you are starting the month (if you reconcile monthly) with good numbers. If you are not reconciling regularly, you may not be catching errors that just give you bad numbers moving forward. Reconciling is like housecleaning. If you neglect it, the mess will creep up on you.
How often should you do a bank reconciliation?
The short answer is monthly. Each month your bank gives you a bank statement. That is when you do your bank reconciliation.
It might sound like a lot but if you reconcile monthly it eventually will not take much time and you will really be managing your money well.
If you procrastinate and skip months it just gets more difficult. There are more transactions to check. If your records are not matching the bank statements then it could take you a long time to find the discrepancy.
How to do bank reconciliation
There are four steps to doing bank reconciliation. The same steps apply whether you use a paper or electronic method. The only difference really is that in a paper method, you are manually calculating and are limited when it comes to sorting and finding data easily.
For this post, I am going to assume a paper method so that you have the basic concept, but going forward you can reconcile online if you choose. So grab your check register and let’s begin. If you don’t have a check register or don’t know what a check register is then check out these links to get started. Remember, this is for concept only unless you like the manual method.
how to fill in a check register
Step 1 – Beginning Balance
The first thing you want to do is make sure that the beginning balance that the bank notes on the statement match what your ending balance was from the last statement. This ensures that your starting point is the same.
In this example, the beginning balance is $5.12.
Write that number down
2. Check and add up all of your deposits
Your bank will include a list of all of your transactions for the month. Start with the deposits. Make sure that each deposit the bank lists matches the deposit on your check register.
Make a notation on your check register for all of the deposit transactions that match. A checkmark, the letter R (reconciled), or an X. It does not really matter just pick what you like.
Now get the sum of all the matched transactions. Your number should be the same as what the bank shows.
In this example, the sum of the deposit transactions that matched the bank’s records should equal $635.00
3. Check and add up all of your withdrawals
Do the same as in step 2 but for your withdrawals, check, etc. Make a note of the transactions that match, ass them up, and check that the total is the same as what shows on your bank statement.
In this example, the total should be $382.95
4. Compare the ending balance
The final step is comparing your ending balance with the bank statement.
Start with the beginning balance, add your total deposits and subtract your total withdrawals. This leaves you with your ending balance. This balance will be your beginning balance the following month.
In this example, the ending balance should be $257.17
What if you don’t match when doing your bank reconciliation?
It happens to everyone. You think you are so diligent in documenting everything and then you find you don’t match. Below are a few common discrepancies.
I have transactions in my register that the bank does not show
If you have transactions in your check register that are not showing on the bank statement, don’t panic.
If you can account for all of the transactions the bank shows and your ending balance matches then you are just fine. This type of discrepancy generally means that the transactions you are showing have not yet cleared the bank. This is your reason for keeping a check register. You have a more accurate picture of your available money.
My ending balance does not match
More than likely, this is a calculation error.
Double-check that your beginning balance is accurate and that all of your transactions that match the bank transactions are accounted for. Check the amounts carefully.
If everything is accounted for then it is your calculation.
I don’t have transactions that the bank shows
Verify that the bank transaction is legitimate before adding it to your check register. If it is not, then contact your bank right away regarding the discrepancy. If it is legitimate then add it to your register and recalculate.
How to make bank reconciliation a simple process
The less time you spend on bank reconciliation the more simple it will be. As long as you are regularly and accurately updating your check register and reconciling your bank statements each month the process will not take much time. Consistency and accuracy will make this process easy.
Summary
Bank reconciliation will give you security knowing that the available balance you think you have is accurate. When you reconcile your account each month you will catch and correct errors faster and notice unusual banking activity.
Reconciling your bank account is a task that should be done if you want to have good money management practices.
If you have any questions at all or need some help, please contact me.
Thanks for reading!
Stay balanced,
Jill