The term, account reconciliation, refers to comparing transactions you have recorded for a financial account against a monthly statement from a bank, credit card or other financial institution. If you're not yet using personal finance software, the record of your transactions would likely be in a paper register that you keep updated, like a check register. If you're using personal finance software, your transaction records are in the form of your account registers.
Chances are that on any given day, your banking and credit card accounts will show a balance that is different from the one that you have on record. Reconciling accounts monthly is the best way to ensure that your account balances are identical to the balances at the bank or other financial firms.
The value in taking the time to go through the procedure of comparing transactions and balances is that your bank account will never be overdrawn and you won't go over the spending limit set on credit cards, which saves you from having to pay some very high overdraft fees.
Another benefit of reconciling your accounts is that the process of comparing transactions enables you to find any incorrect transactions, duplicated charges or fraudulent activity so you can have your accounts corrected. Credit card companies won't hold you responsible for fraudulent charges, but people who avoid reconciling or at least looking over each account statement can lose a lot of money over time when small unauthorized charges are made frequently by criminals. Most banks will forgive amounts drawn on your account if someone steals your checks and you report the activity quickly, but this is not always the case with ATM cards. Reconciling your accounts every month is the best way to avoid these expenses.
The Procedure for Reconciling Accounts
When you use personal finance software to reconcile accounts, the software does all the math for you, which can save a lot of time. This software can also download transactions for you, so there is no chance that you'll transpose numbers in the account register, which is easy to do when you keep a register on paper. Some online personal finance software reconciles accounts, and all or almost all Windows and Mac financial software has this feature.
While using software to reconcile accounts is recommended, it's a good idea to understand the process:
- Compare your account register to your bank or other financial statement and check off each payment and deposit on your register when it matches the statement. If you're using the reconciliation feature in financial software, you just use your mouse to check off the items that clear.
- Identify checks, ATM transactions and charges that you have on record but are not listed on the checking or credit card account statement. Subtract these items from the statement balance (financial software does this step for you). Charges to watch for include those for check printing, ATM and other services charges, and nonsufficient funds (NSF), overdraft or over-the-limit fees.
- Find deposits and account credits that haven't been recorded by the financial institution yet, and add these to the statement balance (financial software handles this step for you). If you have an interest bearing account and you are reconciling a few weeks after the statement date, you may need to add in interest as well.
- You shouldn't find bank errors often, but if any errors were made, the amount needs to added or subtracted from your balance. Contact the bank immediately about any errors.
- The new statement balance should now equal the balance in your records. If it doesn't you'll need to comb through the transactions to determine what needs to be adjusted to bring the records into balance.