The term reconciliation basically refers to the process of making two things consistent or compatible. In the case of balancing a check book, this process is used to make the balance in your checkbook register consistent with what the bank considers to be your balance -- something that can't be done simply by comparing one with the other.
Why is Checkbook Reconciliation Necessary?
Checkbook reconciliation is necessary for three reasons.
- Because there is usually a delay between when the bank closes it's month out and when you get your copy of the closing statement. Any transactions that occur during this delay will be recorded in your checkbook register, but will not appear on your statement.
- Because checks (or debits to your account) are not received by the bank on the same day you write them. Any checks written in the past but not cashed will be recorded into your checkbook register, but will not appear on your bank statement.
- Because some adjustments to your account occur behind the scenes (electronic fund transfers, or EFTs). Since the bank doesn't call to remind you that these ETFs have occurred, it's easy to forget to record them into your checkbook register.
Why Reconcile Bank Account?
If you are not faithfully reconciling your check book with your bank statement, then you run the risk of being assessed stiff overdraft charges. And if not caught in time, these overdraft charges can pile up in a hurry.
The only way to avoid overdraft charges is to faithfully perform a checkbook reconciliation as soon as you receive your bank statement. Personally, since I do all of my personal financial bookkeeping bright and early on Sunday mornings, this means that I always perform a checkbook reconciliation on the first Sunday following the receipt of each bank statement.
How to Balance Check Book
If you've never done it before, here are the steps to balance a check book:
- For each line on your bank statement, check to see if the listed item is recorded in your checkbook register. If an item is found, place a check mark next to the item on the bank statement, and also place a check mark next to the item in your checkbook register. Be sure the amount listed on the statement is identical to the amount recorded in your check book.
- For each unchecked item on your bank statement, record the missing item into your checkbook register and recalculate the balance.
- On a bank reconciliation form, list all deposits from your checkbook register that do not have a check mark next to them, and then find the total. These are deposits that you have made but that the bank received after it created the statement. These are sometimes referred to as deposits outstanding, or deposits in transit.
- On the bank reconciliation form, list all withdrawals (checks) from your checkbook register that do not have a check mark next to them, and then find the total. These are withdrawals that you have made but that the bank received after it created the statement. These are sometimes referred to as withdrawals outstanding, or withdrawals in transit.
- Add the total deposits outstanding (#3) to the ending balance on your bank statement, and then subtract the withdrawals outstanding (#4). The result is your adjusted statement balance.
- Compare your adjusted check book balance (#2) to the adjusted statement balance (#5). If the two match, your checkbook reconciliation was successful (check book balance is equal to the bank's recorded balance). If the two do not match, then your check book balance is said to be "out of balance." This is usually caused by addition or subtraction errors in your checkbook register, so your mission at this point would be to find and fix the errors until the two adjusted balances reconcile (match each other).