Define Bank Reconciliation

One of the most important aspects of our financial well-being is to know exactly how much money we have and to ensure that there are no errors on the part of our bank or ourselves. Each month the bank sends a statement to all the holders of accounts to verify deposits, withdrawals, checks and payments.  To ensure that you have a good grasp on your finances, it is wise to go through the statement each month and check for any errors on the part of the bank or on your part. Your errors may arise from forgetting to enter a check, payment or withdrawal. By going through the check register for your account and comparing it to the statement sent by the bank, you will be able to spot any discrepancies that may exist. This process of double checking is called bank reconciliation.

Banking Ledger

Each account with a bank should have all its transactions tracked by entering them into a register. The balance of the account is placed on the register and then each deposit or expense is recorded. Add or subtract each entry accordingly from the last balance. By keeping track of this information, you will be able to tell how much money you have at any given time. There are instances where errors can be made by entering the wrong amount of a transaction or by making a mathematical mistake in adding or subtracting values. Because of this, the bank statement sent every month allows both the bank and you to keep the time period between checks on the account short.

Mistakes are Costly

Making an error in your ledger can create a situation that is very costly to you. Most banks and other financial institutions charge the account holder if there are not enough funds in the account to pay checks or withdrawals made on the account. Each transaction of this type can cost as much as $40. By keeping a record of your transactions, you can avoid these charges. Not only are overdrafts costly in a monetary sense, but they can also reflect on your credit worthiness. Most banks offer “bounce protection” or linking of your checking account with your savings account to avoid writing a bad check, but these services also carry charges with them.

Define Bank Reconciliation

Each month’s bank statement begins with the closing balance of the account on the last month’s statement. To reconcile the current months statement add the sums of all the deposits, checks, withdrawals, bank charges and electronic payments made throughout the month. 

To check if your records agree with those that the bank keeps, using the balance of your register add or subtract all payments or deposits made on a daily basis to ensure that your balance never drops below zero. At the end of the month, your ending balance in the register should agree with the ending balance on the bank’s monthly statement, after it has been corrected for deposits, checks and charges that have not cleared the bank yet.

If there is a difference in the two balances, go back over every single transaction and check the amount shown on the bank statement with the one recorded by you in the register. Double check your math for each transaction recorded and make sure there are no extra charges or deposits you missed throughout the month.

Missing Charges

Missing charges may be explained by bank charges for your account balance dropping below zero at any point during the month. Another place that you may find errors is if you have not recorded automatic withdrawal or payments you have set up with your bank or creditors.

When you are unable to locate an error between your records and the bank statement, contact your local banker and schedule an appointment to go over the statement and have them show you where the error is located. It is rare but possible that the bank has made the error. By performing bank reconciliation each month, you will have a better grasp on your finances and keep your banking records correct.