Reconciling Checking Account Methods 4100

Personal Finance presentation, reconciling checking account methods prepare to get financially fit by practicing personal finance. First, we’ll discuss the importance of reconciling the checking account. And then we’ll think about methods to do so. So if we do not reconcile a checking account, we will not know things like our exact spending habits with the correct timing. So what we would like to be able to do is record the transactions when we actually spent the transactions, not necessarily when they cleared the bank, because that could be some time, especially when we’re thinking about checks between the timeframe that we spent the money and the time that it clears the bank.


And what we would like to do for a budgeting standpoint, is be looking at the timeframe when we spent the money so that we can be planning in the future appropriately, and also know the correct amount that would be in our checking account, given those expenditures that have taken place to which may not have cleared the bank, that we also would not know whether a check has been written and not cleared.



So in other words, what we would like to be able to do is enter the transaction beforehand, whether it be a cheque or some other type of payment that we’re going to be making, and then know whether or not it has cleared the bank. And that will determine to us when we made the check when we sent the check, and whether or not the other person has cashed it. This is very important in situations say we make a payment to someone else say we pay the rent or something like that with a check,



someone comes back to us and they say, look, you did not pay us, we would like to have a record of when we wrote the check, as well as a record of when the check basically cleared the bank, noting that when a check clears the bank, few things have to happen time can pass between that timeframe, because the other person has to receive the check, they got a deposit into their account. And then their account has to talk to our bank before that payment is made. So those are things that we would like to confirm when we made the payment and when the payment has been cleared to the bank.



Now this will change to some degree when you’re talking about electronic payments, because they’ll be a bit faster than the checks. Although we have the same kind of situation, we would like to say, hey, did we actually make the payment and then determine whether or not the payment went through in terms of our bank, meaning it left our checking account, although the timeframe before an electronic payment should be far less than you would think a check, especially if your mailing the checkout. So we would not know if the current deposit amounts have been applied to our account.



So the same thing on the deposit side of things, we want to make sure what we would like to do is say, hey, if we’re making the deposit, this also will kind of depend on where our deposits are coming from our deposits all coming from one source like a W two employee, and they’re just being direct deposited in, in which case we can be fairly certain of the consistency of the deposit, or are we making money in other areas as well. And we’re making deposits, especially if we’re making deposits like cheques or something that we are receiving,



we would like them to be able to track the fact that we have deposited the money into the bank, and then see that the bank has been cleared it, the timing difference between these two things should be faster, because obviously, it’s our bank. So if we’ve made the deposit, it should take only like three days for them to clear the bank. But we would still like to have that kind of double check to make sure that the deposits that we make are clear in the bank, any unauthorized ATM withdrawals. So note that if you’re not tracking, in essence, the money that you’re taking out of the ATM.



Ideally, we’d like to be saying when I’m taking money out of the ATM, we log it down. And then when we look at the reconciliation process, when we look at the bank statement, we can then say, hey, this money came out of the bank. Is that true? Did I really pull money out is that how much I pulled out last Wednesday or something like that, so that you can track that Now many people don’t do that as much. Because note that as we have more of these electronic transfers, we don’t have our checkbook all the time. We’re not actually all of our spending and whatnot isn’t being done simply with the checkbook.



So many times people don’t you know, record things like the withdrawal of the ATM fees, and just kind of depend on the bank because we can see the money coming out on the big transactions. But we don’t have that kind of verification, if someone was to steal money out of the ATM somehow getting access to our account on the ATM. If we look at it, you know, a few days later, and we can’t really tell if that was the US that drew the money out or not. So what would be what we would like to do in a full service accounting system is whenever we took the money out, we’d record the fact that we took it out.



And even above that, if we want to track what we spent it on. We would like to say we took it out for this reason or that reason so that we can then track the actual accounting in terms of the account that it should be basically going to as well. And then if your bank is is overcharging you with these, so that’s another area that will basically recognize most people of course We won’t know how much the bank is actually charging us until we look at the bank statement to track the charges that they’re going to have.



Because it’s not something that that we are recording the transaction for as we go, because it’s something that’s that the bank is going to charge this for once we have agreed to the checking account services, so we need to basically record them periodically, usually when we do the reconciliation process, and if there’s an error your bank may have made. So if the bank does make an error, the way we catch that error is by doing the reconciliation process.



Now, this is probably the least likely thing to happen. Because it’s usually the case that we need to record something, we made the error, we need to fix something the banks usually write on it, and we got to adjust our end. But it’s possible if the bank makes an error too. And if that bank makes an error, we want to check that out. So it’s probably more possible than the bank making an error equally possible, maybe that someone steals the money as well. So if you have an event of theft, or something, or if you have an event of an error, these are your safeguards against those generally as well.



So methods how do we how do we do that? How do we do our reconciliation process. And this has become a little bit different these days, given the fact that we have these electronic transfers. And you might have slightly different methods, it used to be that every time we made a payment, it was basically with a cheque or cash, right. And then, if we made it with a cheque, we can record it in our checkbook each time. And so we always had our checkbook with us in our check register.



And we can basically record that as we go. But now, credit cards, debit cards, ATMs and whatnot, we don’t always have the checkbook with so you got to come up with some kind of system to record this information. Usually, for a full service accounting system, what you want to do is record the transactions as you make them, whatever format those transactions take, especially checks however, where it’s more important, due to the fact that the checks have that long timeframe between when you write them and when they might actually clear the bank.



But still important, or it could be important on electronic transfers as well, if you want that double verification, which is the which is kind of the point of it. But in any case, we got the methods, you could use accounting software, this could include things like QuickBooks, you could do something with zero, there’s wave accounting, which I think is a free software that can be used. And so you do not need this is accounting software that uses the double entry accounting system. So we’re not talking financial software, which is just pulling the ending balance from your financial institutions, because that’ll help you with like making a balance sheet.



But it won’t help you with reconciling what we’re talking about here is something that will help you to reconcile, we’ll talk a little bit more about these different methods later. But so we’re talking about some kind of software that uses a double entry accounting system, which you would oftentimes think of this kind of software business software. But you can do the same double entry accounting system applies to the personal finances as well, you do need to know some financial knowledge. In order to do the bookkeeping. In that way. You can also enter the transactions into the checkbook register,



which is the old traditional method, right, we have our checkbook register, we enter the transactions into the register, recording the transactions as we make them, so that we can then compare the transactions we’ve recorded, compare our running balance in our check register, then to the bank, and on a periodic basis, oftentimes doing it on a monthly basis when we get the bank statement. And we can also enter the transactions into a spreadsheet. So we might actually do a paper spreadsheet, such as this, actually just write it down in a spreadsheet. Or you might use Excel or Google Sheets simply to record the transactions.



Again, here, I’m thinking about recording the transactions as we make them, not as we can do to taking the transactions from the bank, meaning you’re gonna say, well, can’t I use the software to get the transaction from the bank? Can’t I get the bank statement to do it by hand and get the transactions from the bank? Can’t I download this transactions from the bank to excel? Yes. But when you do that, you’re looking at the transactions that already cleared the bank. And the whole point of the reconciliation process traditionally, is to give a double check, meaning the banks do in its records of your transactions, you’re doing your records of your transactions separately.



And then you compare and contrast them. That’s what gives you that double verification, if all you’re doing is getting the information from the bank, then you’re not getting a double verification, you might do that system, you might use it, but you’re not getting the same internal control that you would have. And you’re not going to be able to find things like outstanding checks and whatnot. Because if they haven’t cleared the bank, they’re not going to be on the bank side of things.



They’re only going to be only going to catch those things if you do your side of things and then compare to what the bank has. So So let’s think about these the electronic transfers Now remember, the electronic transfers have have really kind of changed things for a lot of people and they might make it, you know, some certain transactions where you’re saying, Hey, you know, because there’s not this big difference between the check goes out in the mail. And so what’s in the check might not clear, I have more assurance that the checks in the payments gonna go out in a shorter period of time, I don’t have that particular need as much with these types of payments, although you still may want kind of a double verification.



And also you’re not carrying around your check book, possibly all the time, when you’re making payments with like an ATM card or something like that, possibly. So you might need a different system, when you’re making those those kinds of transactions, you might trust, of course, the bank to some degree more more so in those transactions meaning when you when you make the payment from from a debit card, and you make the payment, you might go home and record that transaction and trust that it cleared the bank why because you know it cleared the bank because you got the gas or whatever you paid for at that point in time.



And and it’s not like the check, you know, had to go in the mail and clear and clear the bank and take take a long time to do that. So you might choose some different methods in terms of how you’re going to rely on depending on the types of payments you have, particularly making a difference between the electronic transfers and the paper checks. So there’s less time between the transaction date and the date, it clears our checking account with regards to the transfers, there’s usually more information in the description on our transaction or credit card transaction without the need to pull the canceled check.



So this is another kind of issue when you write a check. Note that even when it clears the bank, the bank the general information on the bank statement only says that it’s a check, and it gives you the check number. If you want to know who you’re paid it to, you got to look up the canceled check, which oftentimes you can find these days in the online check in it used to be that you had to go get the canceled check or possibly pay for it, meaning the actual physical check that you wrote, that is now cancelled, you’d have to basically get that. But just looking at the normal data, even on the online feeds with a normal check is not as much data as with an electronic transfer.



So that therefore it’s more useful for you when you write a cheque to write down what you spent the check on who the vendor was, so that you can come back and record that on your books. And but with the electronic transfer, oftentimes in the memo of just the electronic transfer, it’ll, it’ll hopefully tell you possibly who the vendor was there give you a good idea of it. Often times, therefore, it may not be as important because you can go back home and say, Okay, I just spent the money out of the debit card, I can look at my electronic transfer, and it’s not going to just tell me the date that I spent it, it’ll also tell me hopefully, who the vendor was that I spent it on.



And that’ll help me to do my bookkeeping or record it a little bit more easily, hopefully, because we do not use the checkbook, while making transactions, it may be more difficult to record as we make the transaction. So you might come up with a different kind of system, that with the electronic transfers are you going to pull out your checkbook every time and record your ATM transfer, or you’re just not going to use the ATM as much or you’re going to basically go home and record the ATM transfers or so on with recording that kind of transaction,



we generally have an audit trail out from the electronic transfers to the electronic transfer gives us a very nice, you know, audit trail and it’s basically an audit trail that takes place pretty much automatically where again, the check, if you’re mailing the check, then you know you don’t see the transaction until it’s cleared. So then we have the accounting software. So if we look in the accounting software, I’m thinking something like bookkeeping, software, QuickBooks, zero wave accounting, something like that, something that uses a double entry accounting software, you can use bank feeds to pull the banking activity and credit card activity.



So you might say, and this is often advertised in this kinds of software packages, they say, hey, look, you can connect to the bank. And you can pull in the transactions which you can, which is great. And you might be able to just construct your entire books just from the transactions that you pull directly from the bank, which is great. And that’ll give you financial statements and help you to track things and whatnot.



Although you still need to know some bookkeeping to do that, because you’re going to need to know how to how to apply those transactions still, because the software doesn’t know how to transform the vendor that you paid in the memo of the electronic transfer or the check numbers to to actual account categories, utilities, and so on so forth, it’s it can guess, but you’re gonna have to tell it exactly where to where to set that stuff up. However, if you do that, you’re not really reconciling.



Because what you’re doing right there is you’re simply pulling and creating your financial statements from stuff that already cleared the bank. And so you’re not going to so that might be a system that could work for you and give you a lot of information, but it’s not going to tell you things like your outstanding checks. So if someone comes back and says you didn’t pay me this and you say I sent you a check, you know, you can’t it’s not may not, she’s not going to show anything that didn’t clear the bank, because you got your information from the bank.



So any timing differences we have for deposits that we made or checks that we wrote any transactions going in or out that we know we did, we facilitated but have not yet cleared the bank will not be shown unless we do two sides of a transaction, meaning we still enter the data on our side, we enter the checks when we write the checks. And then we verify that they cleared the bank by matching them to something like the bank feeds, that would give us that same kind of reconciliation. Again, you might use either method that works best for you if you do all electronic transfers.



And and you know it’s less security or it’s less double check, if you don’t do that, the full service accounting. But again, you’re you want to do what’s best for you, right in terms of your accounting system. So however, bank feeds did not eliminate the need for some bookkeeping knowledge. So if you do use software, do not think that you’re just going to basically connect to the bank. And that’s all you’re going to have to do and everything will just work out perfectly, you should do still the bank reconciliations whether you do a full service accounting system. And we have a lot of information on this, if you want to look at our our accounting methods that we could, we could take a look at it. And you’re still gonna have to assign the expense accounts.



So bank feeds also did not eliminate the need to enter transactions into the system as they happen if we want to track outstanding checks and outstanding deposits. So if you want to be able to see if something cleared or not, especially if you are writing some portion of physical checks, then which have a longer outstanding component, then you have to enter those checks when you write them. That’s what’s gives you the double verification not not just wait till they clear the bank. So a checkbook register or spreadsheet. So the other method you can use is use the checkbook register or a spreadsheet. This is the old fashioned method, and you could still do it, it’s still fine.



And you could still track those outstanding, those outstanding items. So what would you do you just record the transaction date as you as you record it and say the check register, write the name of the person or organization receiving or paying the money. So you want to know who you’re paying. If you’re writing a check, when you’re receiving deposits, you probably only have a few people that you get deposits from if you’re say a W two employee, I know I got all my deposits from my employer. But if you have a business or something like that, then of course, it becomes more important to write down your deposits.



Or if you’re getting deposits from other people, then you want to write down who you got the deposit from. And when you’re making payments with a check. Then remember, again, the check number is all that really shows up in the transaction, even when it clears the bank until you get to a canceled check. And so you want to write down who you paid to write and who you paid to, will then help you to determine what account it should go to. So if I paid the vendor of the utility company, then I’m going to charge it to the utility account. If I paid a restaurant, then I’m going to charge it to meals and entertainment or something like that.



So you got to know who you paid. Because that vendor hopefully will help you to determine which expense account it should be going to record the proper expense or income account or reason for the payment or deposit. So it’s useful to then log down, of course, why you made the payment, and possibly the related expense account. Especially if you take this information and give it to somebody else who might be helping you do the bookkeeping, then you want to make sure that you log down the reason.



So they can convert the vendor that you paid to the expense account to record it. In the bookkeeping as an expense line item, record the amount of the payment or deposit, compare written checks and deposits with those reported on the bank statement representing that those transactions have been cleared. So then traditionally, we would say monthly, we would get the bank statement, right, we would get the bank statement, you could do this kind of as you go and determine how much outstanding items are. But traditionally you’d get the bank statement.



And then you compare and contrast on a monthly basis. Everything that has cleared the bank for that period, and everything that is on your register. If something is clearing the bank, meaning it decreased your checking account or increased it and it’s not on your register on your books on your spreadsheet. That usually means that we made an error, we need to include it on our books unless the unless it’s wrong. That usually means we have to adjust our side. If on the other hand, it’s on our register on our books on our spreadsheet, but not on the bank statements not on the bank side.



It’s most likely due to an outstanding check or outstanding deposit most likely and outstanding check, a check that we wrote, but has not yet cleared. That means that that’s the difference. That’s the difference we’re looking for between our books and the bank’s books because that means the bank’s kind of wrong, but they’re not wrong because they made an error. They’re wrong because If they don’t have the information yet, we know what happened. Because we wrote the check or we made the transaction, it just hasn’t cleared the bank yet, because it’s going to take time to do. So that’s going to be the reconciliation if we know exactly what the difference is between the bank balance and our balance.



And if we did our books separately, we recorded our books separate from the bank. And we can reconcile the two. That gives us a huge internal control that things have been done properly, because now we have two separate entities doing the bookkeeping for the same things transactions separately, that have now reconciled their accounts showing that they’re showing the same data even though recorded separately, which gives that that outside verification, that’s the internal control you’re looking for, really.



So any charges on the bank statement not recorded in our records likely needs to be added to our records. Any charges on our records, not reflected on the bank statement, likely reflect timing differences, outstanding checks and outstanding deposits. So we’ll do some practice some practice problems on the bank reconciliations here, really useful tool to have

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