Definition: A process a bank account owner takes to make sure that what it believes is in the account is the same as what the bank believes is in the bank account.
Example: Liam receives his latest monthly bank statement in the mail. The statement says that he has $340 in his account. Liam opens his checkbook to see what it says. According to it, he has $400 in his account. Who’s right? They both are! How? Let’s take a closer look:
1. The bank charged Liam $10 when he ordered new checks earlier in the month. They took the money out of his account, but he hasn’t yet recorded this charge. He writes this charge down in his checkbook, lowering his balance from $400 to $390.
2. From the post-mark on the envelope, Liam sees that the statement was put in the mail by the bank three days ago. Two days ago, he made a deposit of $100 into his account. The statement could not possibly contain this deposit because it was in the mail when he made it! When this deposit is added to the $340 the bank statement says is in his account, his balance according to the bank will be $440.
3. Finally, Liam sees that a check he wrote to his uncle for $50 two weeks ago which his uncle has not yet brought to his bank to cash it. Therefore, Liam’s bank doesn’t know about it and it’s not on the bank statement. As soon as his uncle goes to the bank and collects his $50, the balance according to the bank will be $440 minus $50, or $390. Both Liam and the bank see that when everything is brought up to date both he and the bank agree he’s got $390 in his account. Account reconciled.
Investeach explains: Reconciling one’s bank account can be difficult and confusing, so much so that many adults have simply given up on this important monthly chore. By giving up, they lose their ability to catch errors that the bank has made. Bank errors, while rare, do occur.
Riddle me this:
- What can cause the balance on the bank statement to be different than the balance you show in your checkbook register?
- Identify one transaction that can be on your bank statement but not in your checkbook register.
- Identify one transaction that can be in your checkbook but not on your bank statement.
- Why is it important to reconcile your checking account?