Reconciling your Personal or Business Bank Account

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For many of us, opening a bank account is our first formal financial transaction. Before that, we all paid with cash, and most of the time it was for miscellaneous things and not too expensive. As we grow, our expenses become more complex, and our financial transactions require the opening of a bank account.

The bank account

Banks and other regulated financial institutions maintain the financial transaction records of people, businesses, trusts, and others in separate accounts called bank accounts. These accounts maintain records of deposits, withdrawals, transfers, and other miscellaneous transactions that inform the continuous balance to the owner. Although the financial institution maintains the account, people and businesses own those accounts.

Elements in a bank account

The typical bank account has a deposits and credits side, a checks and debits side, and a balance side. Nowadays, more accounts have transfers and other electronic transactions, but pretty much it is the same as previously mentioned.

Transactions with the financial institution

If you are familiar with accounting terminology, you may note that debits and credits have an inverse relationship between your business accounts and your bank account. In fact, a debit or check for a bank decreases your funds balance from the financial institution’s perspective; on the other hand, a credit or deposit for a bank increases your funds balance from the financial institution’s perspective.

Why reconcile?

Since we have our personal or business bank account and the bank has the same account, why do we want to reconcile? Please note, there are two basic reasons for reconciling bank accounts: (1) There are time differences between when deposits and checks are made and when the financial institution receives those transactions either for credit or to debit your account. (2) Errors might be another difference made by either party at recording transactions or amounts that need to be corrected. At the end, the reconciliation will provide the true or correct cash balance.

How to reconcile?

First, obtain the cash balance per your records (personal or business) and the cash balance per your financial institution’s statement. Second, review the deposits side of both accounts.

Deposits – Identify deposits made but not credited by the financial institution; those are typically at the end of the month (or period) and are classified as deposits in transit. These transactions are added to the bank account balance.

Deposits (third-party transfers)—Identify any credits or deposits by third parties that sent a payment, and it is not recorded on your books. Prepare the necessary adjustment to add to your balance. These are added to your personal or business account balance.

Third, review the checks side of both accounts.

Checks – Match all checks paid by the bank with your personal or business account. Most likely there are various checks still outstanding; thus, deduct those checks from the bank statement balance.

At last, review any NSF or other miscellaneous transactions or identify any errors for correcting the balances. Bank charges must be deducted from your personal or business account.

Once everything has been added or deducted, you should be able to obtain the corrected or true cash balance.

Here is an example of a bank reconciliation format:

In summary:

Reconciling a bank account is important; it assists in determining correct balances, identifies errors, and allows one to control any situation that might arise. Apply these basic concepts to your personal or business account.