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The key to balancing your checkbook (or, as accountants say, "reconciling your bank account") is to understand the overall idea of what you're trying to do. Think about it. When your bank statement comes, its balance is never--or hardly ever--the same as your checkbook's balance.
Why is that? The primary reason is timing differences. You could also have made an error in your math in your checkbook (not unusual) or the bank could have made an error in its processing (not usual, but still possible). If either of those has happened, you need to find the error and fix it.
Timing Differences
The bank cuts off processing your account at the end of a certain day each month and prints a statement showing the activity in your account. The bank, however, will not know about some of the transactions you have in your checkbook. You will have written checks in the last few days before the statement (and in the days since) that did not reach the bank in time to be included on the statement. You may have made a deposit a day or two after the cutoff date, which would also not be on your statement. It is in your checkbook, though, so it is a timing difference. Bank charges for printing your checks and monthly service charges typically appear on your statement. You may earn interest on your account, which will also appear on the statement. These, too, are timing differences, because you have not yet written them in your checkbook--you don't find out about them until the statement comes.
The Overall Objective
The overall objective of this balancing process is to find out what the real balance is. If you knew everything that had happened, including the timing differences from the bank statement, what would the balance be? If the bank knew about all your checks and deposits that didn't make it to the statement, what would the real balance be? The real balance should be the same in both cases. If it is, then the account is balanced.
The Form on the Bank Statement
Your bank statement invariably has a form for balancing the account on the back. These forms always look the same. Use the form to balance the account. The body of the form will look like this:
Balance shown on bank statement
________________
Plus: Deposits in transit:
Date_______________ Amount ___________
Date_______________ Amount ___________
(there will usually be 4 or 5 such lines)
Total deposits in transit ________________
Less: Checks outstanding
Date_______________ Amount ___________
Date_______________ Amount ___________
(there will usually be 4 or 5 such lines)
Total checks outstanding ________________
Adjusted bank balance ________________
(This next part of the form is usually in another column to the right of the stuff above.)
Balance shown on checkbook ________________
Plus corrections and interest:
Date_______________ Amount ___________
Date_______________ Amount ___________
(there will usually be 4 or 5 such lines)
Total additions ________________
Less: Charges, fees, and corrections:
Date_______________ Amount ___________
Date_______________ Amount ___________
(there will usually be 4 or 5 such lines)
Total deductions ________________
Adjusted checkbook balance ________________
Step-by-Step Instructions
1. Enter the bank balance from the bank statement on the first line of the form.
2. Determine if there are deposits in transit. Compare the deposits listed in your checkbook with the deposits listed on the bank statement. Make a checkmark by each item as you match them from checkbook to bank statement. When you finish checking all the deposits, the ones without a check mark are what the form calls "deposits in transit." List them in the blanks under "deposits in transit" on the form.
3. Figure the total deposits in transit, and write it on the total line.
4. Figure your outstanding checks. Outstanding checks are those you have written and recorded in your checkbook that have not yet come through the bank. Compare the checks listed in your checkbook with the ones shown on the bank statement. Make a check mark by each item that has cleared the bank as you match them up. When you finish going through the checks, the ones without a check mark are your outstanding checks. List them in the blanks under "outstanding checks" on the form.
5. Figure the total outstanding checks, and write it on the total line.
6. Add the balance shown on the bank statement (the first line on the form) to the total deposits in transit, then subtract the outstanding checks. Write this on the line for the adjusted bank balance. (If you can't remember which one to add and which to subtract, the form tells you. When it says "plus," add it. "Less" means to subtract.) The result goes on the last line of that part of the form: "Adjusted bank balance." This represents what the bank balance would be if the bank knew of all your checks and deposits, not just the ones that have already come through.
That's the hard part; the remaining steps are easy.
7. Write your checkbook balance on the line that calls for it.
8. Check to see if the bank statement shows additions to your account that you don't have in your checkbook, such as interest earned. List them under "corrections and interest."
9. Figure the total additions, and write it on the total line.
10. Check to see if the bank statement shows any deductions from your account that you don't have in your checkbook, such as service charges or check printing charges. List them under "Charges, fees, and corrections."
11. Figure the total deductions, and write it on the total line.
12. Just as we did in step 6 above, add the balance on the first line of this side of the form (checkbook balance) to the total additions (the first subtotal), then subtract the total deductions (the second subtotal) to arrive at the adjusted bank balance. Write that on the last line.
13. Now for the moment of truth. Do the two adjusted balance lines agree? If so--and they usually will--you have successfully reconciled your bank account. You have balanced your checkbook. You now know that you haven't left anything off your checkbook and the bank hasn't goofed up any of your transactions. And you know how much money you really have.
14. Write any additions and deductions in your checkbook.
15. If the two balances do not agree, you've missed something. Go back and check it all out again. Be sure as you compare the deposits and checks from your checkbook to the bank statement that the amounts agree exactly. Sometimes the bank will misread your handwriting or make some other error. Go back and check your math on the form. The most likely problem, however, is that you've made a math error in your checkbook. You can go back and re-add it all to find the error, or you can simply believe the bank is right and adjust your checkbook balance to match the bank. If the amount is large, go find it. If the amount is small, it may not be worth your time to track it down.
The Dangers of Not Balancing Your Checkbook
If you simply do not balance your checkbook, you will never know how much money you have. You'll know what the bank thinks you have, but unless you're particularly good at mentally juggling figures, you won't know how much you really have (after outstanding checks and deposits in transit). And if you don't know how much you have, you may write checks that overdraw your account and cost you money and irritation. You might also fail to pay a bill that you could have paid had you known how much you really had in the bank.
Balance that checkbook; it's worth the trouble.
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