Accounting and Bookkeeping
Balancing Your Checkbook
An organization must balance its checkbook at least once a month to know how much cash it has to operate. This exercise is just like balancing your personal checkbook. Formally, the accounting profession calls balancing your checkbook a "bank reconciliation."
How to Perform a Bank Reconciliation on Paper
Before you start your reconciliation, you will need a few items in front of you:
- The previous month's bank statement showing activity from the previous month and an ending balance. If you use on-line banking and are trying to reconcile before you get your monthly statement, print out the activity from the date of your last reconciliation to the current date. Make sure you have a bank balance as of the date you are doing the reconciliation. Sometimes the balance prints with the activity and sometimes it does not; this depends on the bank.
- A list of all the deposits and withdrawals you think you made for the month. This could be from your check register, a spreadsheet you created for tracking these activities, or a general ledger printout of your checking account if you are using accounting software.
- The balance you think your bank account should have as of the same date as the bank statement or most recent balance that you have.
- Using a spreadsheet program such as MS Excel (see below for a sample bank reconciliation in Excel), enter your ending bank balance in one column and your expected balance in a second column. (You may write your calculations out on paper if you prefer.)
- Compare the deposits on your list to the deposits on the bank statement. Any deposit recorded on your list that is not on the bank statement is considered an outstanding deposit. Add them to the bank balance on your spreadsheet.
- Make sure the bank statement shows the same deposits you have on your list. Add any deposits missing from your list and adjust the expected balance on your spreadsheet by adding the missing deposits.
- Research the reasons behind all missing deposits and think of procedures you could implement to keep this from happening again.
- Repeat the same steps for all checks and other withdrawals. Subtract any outstanding checks or withdrawals found on your list but not on the bank statement from the bank balance on your spreadsheet.
- Compare the new bank balance on your spreadsheet to the balance on your bank statement. Do they match? If the answer is no, go back and find what you may have overlooked. Did you include:
- bank fees
- electronic transfers
Be patient and take your time. This may be frustrating at first, but it gets easier with practice. It will also teach you the importance of discipline in recording your deposits, checks, and withdrawals inside your accounting system, be it on paper or software.
Bank Reconciliations in Accounting Software
Most software packages have a bank reconciliation application, allowing you to reconcile inside the system. This is the best place to do it. You will still need your most recent bank balance and activity list from the bank. The software will prompt you to check the latest bank statement against the data entered and indicate which items have cleared the bank. Some accounting software allows the user to charge the difference in a bank reconciliation to an expense account. Don't do this! Work on your reconciliation until it gets to zero. Plugging the difference defeats the purpose of the reconciliation.