STEPS IN RECONCILING A BANK STATEMENT
Many people who have checking accounts never reconcile the monthly statements they receive from their banks. If you are among that number, you are trusting your bank to keep an accurate tab of your money.
Reconciling your bank statement faithfully on a monthly basis offers several advantages. First, it enables you to catch any mistakes that your bank makes in keeping a record of your transactions. Banks seldom make mistakes but occasionally they do. For example, when I was in graduate school, my bank added one of my deposits to another customer's account. Luckily, I kept my deposit receipt, so all I had to do to get the error corrected was present it to the bank. Upon investigating the situation, the bank found that my deposit had been added to another customer's account; needless to say, the customer had not complained about having extra money in his account.
Second, performing a bank reconciliation helps you discover mistakes that you have made in your check register. It is so easy to forget to record a check or a deposit (that's why it is wise to make the entry in your register prior to writing the check), to transpose two figures (for example, record a check for $35.19 as $35.91), to misplace the decimal point (for instance, record a check for $35.00 as $3.50; accountants call this a slide), or simply make mistakes in adding deposits or subtracting checks. By the way, if a transposition or slide is the only mistake you have made, the difference between the check register balance and the bank balance will be evenly divisible by nine; in the earlier transposition example, $35.91 minus $35.19 = $.72 and $.72/9 = 8.
Third, a bank reconciliation helps you determine what the true balance of your account is. Normally, at a point in time neither your check register nor the bank is showing an accurate balance for your account. This will become evident as you complete the reconciliation problem for this chapter.
You may be thinking, "If bank reconciliation is so important, how is it done?". Actually, the process is fairly simple. Below is a step-by-step outline of how to complete a bank reconciliation. The steps are based on the bank reconciliation form you will be using in this course. Most banks provide a reconciliation form on the back of monthly bank statements. If you can complete a bank reconciliation using the form for this class, you should find it easy to do a reconciliation using the form provided by your bank. Now, let's look at the steps involved in completing a bank reconciliation.
Enter the identifying information at the top of the reconciliation form. To determine whether the account is interest bearing or non-interest bearing, look in the Account Summary Section of the bank statement. An amount for interest would be shown if the account is interest bearing.
Enter the ending bank statement balance, and the ending balance in the checkbook on the appropriate lines of the bank reconciliation.
Compare the checks recorded in the checkbook with the checks shown on the bank statement. You are looking for checks outstanding--checks that have been written, but have not cleared the bank by the time the bank mails the bank statement. Since the bank doesn't yet know that these checks exist, it is overstating the account balance. To account for checks outstanding, list each outstanding check by number and amount on the bank statement portion of the reconciliation form and subtract them from the ending bank balance.
Compare the deposits recorded in the checkbook with the deposits shown on the bank statement. If you find a deposit that is not listed on the bank statement, the deposit is said to be outstanding (some refer to the deposit as a deposit in transit). A deposit made just before the cut off date for the bank statement are likely to be outstanding; the depositor added the deposit to the checkbook register, but the bank did not have time to add it before mailing the bank statement. As a result, the bank is understating the true balance of the account. To correct the bank statement balance, list the deposits in transit by date and amount on the bank statement portion of the reconciliation and add them.
Look for any other items which may be causing a difference between the checkbook register and bank balance. If the account is an interest bearing account, the bank statement will report interest that the depositor has not added to the check register. List the amount of the interest on the appropriate line in the checkbook portion of the bank reconciliation and add it to the ending balance shown by the checkbook. If the bank charges a monthly service charge, the amount of the service charge should be listed on the appropriate line in the checkbook portion of the bank reconciliation and subtracted. As you compared checks and deposits in steps 3 and 4 earlier, you may have discovered that a check or deposit was recorded incorrectly. For example, suppose a check for $77.29 was recorded in the check register as $77.92. The bank recorded the check correctly at $77.29. Notice the depositor subtracted $.63 too much ($77.92 - $77.29), so to correct the mistake, you go to the line on the reconciliation form which reads "List Amount to be Added (+), Subtracted (-) to Correct Checkbook Error;" you enter the number of the check and indicate that $.63 needs to be added to correct the checkbook register.
At this point, you should check to make sure the adjusted bank balance and the adjusted checkbook balance figures are the same. If they aren't, you have made a mistake in performing the reconciliation and would need to continue your analysis. Notice when the reconciliation is complete, both the checkbook register and the bank statement are reflecting the true balance of the account.
Keep in mind in doing your personal bank reconciliation each month, the figures entered in the checkbook portion of the bank reconciliation form would be entered directly in your checkbook register. That is why your bank will only provide the part of the reconciliation form relating to the bank statement.