Finance: Learning to Balance Your Accounts the Old-Fashioned Way
Okay, I admit it: There is really no need to balance your checking account by hand. With all of the software and online options available, the ability to maintain your balance with pencil, paper, and calculator is no longer required.Nonetheless, knowing how to balance your account the old-fashioned way has its advantages. Even if you never plan to do the math yourself, it is valuable to understand what's happening as the software chugs away, so you can more easily resolve problems when they occur.
And they will occur. It happens to everybody sooner or later.
Most bank statements include a worksheet for balancing your account by hand. Give it a try next time you receive your statement, or work through the following exercise. At the very least, check out the "Troubleshooting to Find Discrepancies" section for tips on resolving the problem when your account won't balance. These tips will help even if you're a diehard computer reconciler.
If you've never reconciled your checking account, or if you used to but it's been a while, now is the perfect time to start fresh. Find your most recent account statement and use its opening balance and the transactions listed on it to begin your new reconciliation system.
You'll need list
- Your most recent bank statement
- Registers for your checking account(s) and receipts or notes on unrecorded transactions
- Paper and pencil
- A calculator
To get a mental grip on how reconciliation works, remember that a checking account is a type of short-term loan. When you spend money from the account or deposit money into it, there is generally a delay of at least a couple of days between the time of the transaction and the time it is processed by the bank.
This is why you can't count on the bank's rendering of your account balance to be accurate. The balance printed on your ATM slips, shown in your account record on the bank's Web site, or given to you by the automated phone system or even a live teller is based only on transactions that have cleared the bank: The bank has no knowledge of checks you've written that the recipient has not yet cashed.
So, the best the bank can do is to tell you your cleared balance – useful information, but not enough to know whether you can take out $20 at the ATM without causing a check to bounce. Only you have all of the information to calculate your actual, up-to-the-minute balance.
To get ready to balance your account by hand, gather the equipment, records, and supplies in the You'll Need list that accompanies this section of the chapter, and prepare to reconcile.
The Basic Steps
With your materials ready, follow these steps to reconcile your bank account:
- Check your deposits. Do all of the deposits on the statement appear in your check register? Note: Some banks list electronic deposits (for example, returns of purchases made with a debit card) not in the usual deposits section, but instead with electronic debits. If the statement shows that you have earned interest on this account, record the interest in your register.
- Check your withdrawals. Does every withdrawal and expenditure on the statement appear in your register? You might have to check several sections of the statement for these: Checks, ATM transactions, and electronic debits, for example. If there is an account maintenance fee or you find additional ATM fees on the statement, record them in your register now.
- Record the ending balance shown on your account statement.
- Subtract from that figure the total of all expenditures recorded in your register but not listed on your statement.
- Add to the result of step 2 the total of all deposits recorded in your register but not listed on the statement.
Reconciling Your Account Balance
| Step 1: | Ending balance shown on account statement: | $ __________ | |
| Step 2: | Total of all expenditures recorded in register but not listed on statement: | - | $ __________ |
| Step 3: | Total of all deposits recorded in register but not listed on statement: | + | $ __________ |
| Your current balance: | $ __________ |
Step 1 - Step 2 + Step 3 = your current balance. This figure should match the balance shown in your check register.
Troubleshooting to Find Discrepancies
Uh oh, it doesn't balance. You've double-checked your math, but something is still wrong. Now what?
First, compare the balance you've calculated to the balance the bank statement shows. Which is bigger? If your balance is greater than the bank's, you're probably missing an expenditure. If your balance is less, you might be missing a deposit.
Now look at the amount by which you're off. Sometimes that amount will ring a bell. Perhaps an overage of $7.50 will prompt you to confirm you've figured in the monthly account maintenance fee, or maybe something around $20 is likely to be one of those Amazon.com impulse purchases you sometimes forget to record. A deficit of $15.89 might remind you that you returned a defective CD a few weeks ago and they put the refund on your checking account Visa.
If pondering the amount doesn't bring a revelation, break the problem down into sections. Most bank statements provide subtotals that come in handy in this situation. Chances are you will find the discrepancy in one of these subsections. If your calculated balance is less than the bank's, add up your deposits and compare the total to the deposits subtotal on the statement. If your balance is higher than the bank's, try adding up all of your checks or all of your ATM transactions and comparing it to the subtotals shown on the statement.
If it still doesn't work, check all of your amounts again, figure by figure. Perhaps you've transposed numbers in one check amount, or perhaps you jotted down the wrong amount on an ATM deposit envelope.
Rarely, you'll find an actual error in the bank statement. If it's a large enough amount, call the bank and ask them to correct the error; if it's not worth the trouble, adjust your records and get on with your day. Remember the value of your time: Is a $1 refund worth 15 minutes on the phone? If not, record a $1 debit in your register for Bank Error to correct your balance.
Tip
If your check register is a mess – items crossed out or squeezed in between lines, with the running balance rewritten several times – draw a big, bold line under the last item written in the register and start over. On the first blank line, write, "Reconciled balance as of [date]," and record the amount you just calculated. Now you can resume recording new transactions and keep an accurate running balance.
Replacing Lost Papers
Suppose you're ready to turn over a new leaf and finally get your bank accounts balanced but you can't find some of your recent statements. Argh! What now?
Don't fret: Most documents can be retrieved from their sources. You can begin your new system with just your most recent bank statement, but if you really want to start with January, contact your bank. It should be able to provide you with duplicates of your statements, probably for a fee; it might also be able to give you access to the data online as an alternative to paper copies. Either way, the data exists somewhere within the bank's system; it's not lost forever.
The same is true of just about any record or statement you receive from another company. If you need past utility or phone bills, contact each utility for its procedure. The person who handles payroll for your employer can tell you how to obtain old check stubs or an earnings summary for the year. Your broker should be able to help you track down past investment statements. You can even obtain copies of past tax returns from the IRS. Use Form 4506 to get an exact copy for a fee or Form 4506-T for a free transcript, which is acceptable for most purposes. Visit www.IRS.gov and download the forms or call 800-829-1040 to request the forms by mail.
To do list
- Explore the various software options available.
- Learn how to use the assisted reconciliation function.
- Take advantage of the ability to categorize transactions.
- Review other advanced functions included with some programs.
- Choose and set up financial software.
Reproduced from Organize Your Personal Finances in No Time, by Debbie Stanley, by permission of Pearson Education. Copyright © 2005 by Que Publishing. Please visit http://quepublishing.com/title/0789731797 to order your own copy.
