The Bank Statement and Reconciliation

A check is a contract between you and the party you identifying as the payee on the check. The check acts as a written set of instructions for the bank instructing it to transfer a specific amount of money from your account to individual or organization. When you fill out the amount of the check, to whom it is to paid to and then sign it you have authorized the bank to make this transaction.

When a check is sent to its destination, whether it is written to an individual or a business or sent by mail or in person, the funds will be sent from the depositor’s bank to the payee’s bank. The payor is the party that makes the payment. The payee is the party that receives the payment. The process involves the payee making a deposit in their account and the funds being transferred from the account holder on the check to the payee’s account via the local Federal Reserve Bank. For out of state transaction this process can be time consuming. The time for the check to clear is referred to as the float. After a payee deposits a check and that bank along with the payor’s bank process the transaction, the process is called settlement. When the payor’s bank clears the funds, it debits the payor’s account and credits the payee bank’s account. The payee’s bank, in turn, credits the payee’s account.

The passage of the Check 21 legislation has automated the funds transfer of physical check and drastically reduced the float time and expedited the time to settlement.

The monthly bank account statement sent to you by your bank gives you a detailed review of the activity, included those checks written and subsequently paid, in your account for a specific period of time. The importance of reviewing and reconciling your bank statement cannot be emphasized enough. For most people, the bank statement is record of how they manage their daily finances. The bank statement shows the balances, the cash transactions, ATM use and information regarding the services of your bank. The statement is concise and convenient view of your transactions and the services you use the most.

Reconciling your statement means checking to make sure that the balance you think you have in your account is the same as the balance the bank is reporting. Bank reconciliation is the act of taking documentation issued by the bank and comparing it to documents that are generated by the owner of the account, verifying that the two collections of numbers are the same. Balancing a checkbook is the end result of making certain the transactions recorded along with those outstanding matches the bank both agree on what’s happened to your bank account each month. Since there is a certain amount of expenses associated with managing a checking account as well as the opportunity cost of not manage the available cash balance optimally, successfully managing a bank account and tracking these transactions can be a vital task.

The first task of reconciliation with the bank usually involves comparing the line items on a checking account bank statement and the entries in a checkbook register that relate to the same time period. Once a customer first opens a bank checking account, they are given a check register and some starter checks in order to begin making deposits and writing checks. When customers deposit money into their checking account and write checks, they are creating financial transactions known as debits and credits and that will appear on their bank statements. Keeping track of these transactions will give you a good summary and position on where and when you are spending your money, how well you are managing your funds and give you the ability to analyze what features in the banking sector are most important to your habits and needs.

Reconciling a bank account is not only necessary for budgeting purposes but isn’t very difficult. The main task in reconciling a checking account is to simply check the records you have kept against those of the bank. Do this by entering all transactions you make into a check register and add any service charges by the bank and correct any additions or subtraction errors that appear in your register. The basic steps of account maintenance and reconciliation involve the following process:

Every time you record a check, you should be sure to record the transaction in your check register. Record every ATM withdrawal. Record every debit card withdrawal associated with the checking account. Record every deposit. In a check register, the debits are referred to as deposits, and the credits are referred to as payments. You should always record a check in your register before writing it. If you wait, you might forget to update your register and end up with an overdrawn account.

When your statement arrives, look near the top of it for the starting and ending dates — the period the statement covers. Get your checkbook register and be prepared to match up every debit and credit on the statement with your register.

In your checkbook, make a checkmark in the appropriate box for each check returned or noted on your statement. In addition, also mark all ATM or other electronic transactions, and all deposits. This way, you will be able to identify all transactions recorded by the bank or financial institution handling your checking account.

The beginning and ending balances for the statement period, total deposits, total withdrawals, service fees. Write the ending balance shown on your bank statement, Add the total amount of deposits made that were after the ending date of the bank statement (outstanding), and therefore do not appear on the statement, Subtract the total of any checks still outstanding (checks that you have written that do not show up on your bank statement).

This amount should then equal the amount listed in your check register or checkbook.

Make note of all fees listed on your bank statement. They may be listed separately, or included in the chronology of your account’s monthly activity.

Don’t forget to take into consideration when reconciling the checkbook with the bank statement any preauthorized withdrawals, such as monthly auto loans, utility payments, or mortgage payments. Remembering to add these items to the check register each month can make the stress of reconciliation much lower, since the addition helps to preclude any surprises when the bank statement arrives.

Correct errors by the bank.

Find your own errors and know how much money you actually have.

Don’t overlook the value of your bank statement and bank account reconciliation, your monthly bank account statement gives you easy to identify and detailed review of the activity over time. It’s your best opportunity to make sure your records match the bank’s records and help identify where you can best allocate your assets. Often, reconciliation of customer bank accounts is overlooked, or simply not done at all. Over time, a great deal of inconsistencies may arise, and this will lead to a lack of knowledge as to how and where your funds are being used and in some case may lead to an overdrawn account.

This entry was posted on Sunday, October 12th, 2008 at 11:57 am and is filed under Banking and CD Guide. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.