DIY Bookkeeping Lesson No. 4
It is very important to reconcile a bank statement. If you have ever found yourself standing for an hour at your bank working with a teller to help you figure out why you bounced checks and your account balance is negative, you know what I mean.
The problem is that it isn’t a very fun thing to do and can be complicated, especially with one of those registers that come with your box of checks. And even more difficult if you don’t keep a record of what you spend at all.
Without an accurate accounting of what is in the bank account, checks can be written and sent out without enough to cover them. Of course the result is overdraft fees, negative balance fees and returned check fees, besides the time spent cleaning up the mess from a batch of checks that bounced. Overdraft fees can add up quickly costing you or a business hundreds of dollars a year if proper accounting and reconciling of bank statements is not done on a regular basis.
If you are a bookkeeper, never hesitate to tell a client when you see their balance becoming critically low. Look at the books and try to determine where the problem is coming from. Do this together with your client as often as possible. Is too much going out in unnecessary expenses or is it an accounts receivable problem that is slowing cash flow? Maybe the business isn’t profitable at the moment. Take a close look at the costs of producing products or performing services and see if the business needs to charge more. Maybe the business can lower its costs and expenses by finding new suppliers.
Nuts and Bolts of Reconciling
Every bank has a statement that looks completely different form the others. Sometimes a bank will change the look of their statement, making it frustrating to find what you are looking for. But basically a bank statement consists of these important pieces of information that you need in order to reconcile it with your register:
The statement date of your bank statement should be at or near the very top of the first page. This tells you the beginning and ending dates of the statements, so the transactions on your statement will only include those the bank processed during that time period. The beginning and ending balances are usually somewhere in the upper half of the first page.
The beginning balance tells you how much was in your bank account at the beginning of the reconciliation period. This will be equal to the ending balance from your last statement. The ending balance tells you how much was in your account at the end of the period. This is the amount that you should have as a balance in your checkbook register when you reconcile a bank statement if your transactions with check marks match the bank statement transactions.
Types of Transactions
The transactions on bank statements are usually divided into two main sections, deposits and withdrawals. Deposits consist of money you put directly into the bank, money that was directed deposited by an employer or other entity, money you received by wire, and credits your received from returns or other such transactions. In other words, any money that went into your account. This section may be divided into different parts based on the type of deposit it was.
Withdrawals are any money that left your account. They consist of cash withdrawals at the bank, ATM withdrawals, bank service charges, debit card purchases, ACH debits (electronic debits using your bank routing and account number), and checks you wrote. Typically these are also divided into different sections, usually by debit card, ACH debits and checks.
Checking Things Off
When you reconcile a bank statement the basic idea is to place a check next to each item in your checkbook register as you go down the list of matching transactions on your bank statement. Most of the time, the items are not in the same order in your register as they are on your statement as some take longer to clear the bank than others.
If you find that there are some items on your statement that are not entered in your register, enter them on a new line. If you find some that are in your register but not on your statement, do not remove them until you have gone a few months and are sure they have not cleared the bank.
When you have checked all of the items from your statement in your register, look for the last item in your register with a check mark. Look at the balance in your register next to this item. Enter that number into your calculator. Now, going backward through your register, add to that number all amounts that are withdrawals in your register that do NOT have a check mark. Now, going backward from the last check mark subtract all amounts that are deposits in your register that do NOT have a check mark.
If you did the math in your check book correctly and have accounted for all transactions, then you should come up with a number equal to the ending balance on your statement. If you don’t then you will need to go over things until you find what is missing. If you have done everything you can and the balance is still off, you can make an adjusting entry on a new line in the register that accounts for the difference to bring your register into balance.
This is a basic way to reconcile a bank statement when you use the register in your checkbook for recording transactions. If you use software instead of a paper register then check out my page on reconciling in QuickBooks. The basic idea on that page will help you understand the process no matter what bookkeeping software you are using.