UNDERSTANDING BANK RECONCILIATIONS

Many people can do things mechanically. They can do something without understanding why they are doing it this way. When it does not work out, they become frustrated. They are paralyzed because they cannot understand why it does not work. This is because the have learned this process by rote. They have the knowledge of a parrot. This is not thinking. Thinking means that you comprehend concepts. You know why you are doing what you are doing.

The Frugal Accountant reconciles all of his accounts. He knows the ending monthly balances of his bank, savings, and credit card accounts. He actively keeps up with his accounts. He has a recording system that allows him to track all deposits and expenses. He is able to call the bank or credit card company and have the same balances as they do. At the end of each week, the Frugal Accountant reconciles his accounts and makes sure that they correct with the bank and the credit card company.

The Frugal Accountant knows that you cannot make sound financial decisions unless your financial information is accurate. It is imperative to know your financial condition. Each month the bank sends out a bank statement. This statement reflects all the activity that occurred during the month in your bank account. Each month, there will be additions and subtractions. There are deposits and checks written, fees and debit card activity.

There will be what is known as timing differences between what you say you have in your account and what the bank says you have. A timing difference usually occurs toward the end of the month. If you write a check on January 31, this check will not clear the bank until later. The bank will show that you have more money in your account than is in your register. If the bank assesses you a fee, you do not have in your register but the bank has already subtracted this amount from your account. You need to make this adjustment to your register so that your accounts are reconciled.

Another timing difference is a deposit in transit. This is a deposit that you have made toward the end of the month that you have recorded in your register and the bank has not yet recorded. This difference is to be reconciled in the bank reconciliation that you prepare at the end of each month. You do a bank reconciliation each month, don’t you? Usually, when someone says that they are having financial problems, you will find that they do not reconcile their bank accounts. No wonder they are in financial difficulties.

The key to doing a bank reconciliation is understanding the issue of timing differences. Once you understand this concept, then doing a monthly bank reconciliation becomes a matter of mechanics. The Frugal Accountant has a Quicken Money Program where he does his monthly bank reconciliation. The Frugal Accountant does the church’s bank reconciliation on an Excel spreadsheet.

The bank statement should have a form where you can do your monthly bank reconciliation. The reconciliation starts with the balance per the bank. The timing differences of deposits in transit and outstanding checks come next and are added (deposits in transit) and subtracted (outstanding checks) to arrive at the adjusted ending bank balance. This ending bank balance is compared with the balance from your check register. If not the same, then check the bank statement for any fees. These fees should be subtracted from your ending balance and then you should have the same adjusted balance as the bank. Your account is now balanced and reconciled and you now understand the concept of timing differences.