The Concept of Reconciliation

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What does RECONCILIATION mean?

According to Wikipedia .. Reconciliation may be seen as part of a process of restoring a relationship gone awry, typically as the result of one party causing a rift. (among other things)

According to Merriam-Webster Online dictionary ..
Main Entry: rec·on·cil·i·a·tion
Pronunciation: “re-k&n-“si-lE-‘A-sh&n
Function: noun
Etymology: Middle English, from Latin reconciliation-, reconciliatio, from reconciliare
1 : the action of reconciling : the state of being reconciled
2 : the Roman Catholic sacrament of penance
– rec·on·cil·ia·to·ry /-‘sil-y&-“tOr-E, -‘si-lE-&-, -“tor-/ adjective

According to the InvestorDictionary.com ..
Performing adjustments to the balance in your checkbook so that it matches your bank statement

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I would suggest that this third definition is probably the closest one that we all can relate to. People and businesses often “Reconcile Their Bank” on an ongoing basis, in fact probably on a monthly basis. In most cases, this is a simple procedure. If you keep track of your bank balance in your cheque stubs, what you should be doing is adding all the deposits into the running balance total, and deducting all of your cheques that you issued. At the end of the month, when you receive your monthly bank statement, you can look at the balance of your last cheque stub for the month and compare this to your month-end bank balance, and note any differences.

For the most part, all you have to do is to deduct the bank service charges in your cheque book, maybe any bank loans and automatic debit payments that come through each month as well, and then you recalculate your cheque book total … and it should agree to your bank statement balance.

Sounds simple? It looks simple. You start from one point (your bank statement balance) and adjust the balances until you get to the end point (your cheque stub balance) … Let me illustrate.

Cheque book balance $1,000.00
less Service Charges ($10.00)
less Car Loan Payment ($400.00)
= Equals Bank Statement Balance $590.00

This is the part where a lot of people get confused…

I’ve worked with many people over the years and despite how smart, or successful one can be, not all people understand what it means to reconcile their bank. Let me explain.

Instead of describing the above transactions the way I did … what if I told you that your bank statement balance was $590.00 and your cheque book balance was $1,000.00 ??

(sounds the same HART .. what’s your point?)

Now .. what if I told you that you already included in your cheque book balance this month’s car loan payment, and there was a second loan payment put through your bank account in error. So, in reality, after deducting the monthly service charge of $10.00, your bank balance should have been $990.00 .. instead of $590.00. In this case, when it comes time to reconciling your bank balance, you are not really ending up with one figure or the other, but trying to determine the correct balance and reconciliation is getting BOTH points to agree to that correct balance.

For instance….

Cheque book balance $1,000.00
less Service Charges ($10.00)
= Equals “Adjusted SHOULD BE” balance $990.00

Bank Statement Balance $590.00
plus duplicate loan payment bank has to reverse $400.00
= Equals “Adjusted SHOULD BE” balance $990.00

When you are reconciling a bank, chances are that it is not as simple as the above examples, because there may be other recurring items, cheques issued in the month that have not yet cleared (outstanding cheques) or deposits that you made but not yet reached your bank account (outstanding deposits) … plus items that may have been outstanding in last month will normally clear in the following month.

Did you ever hear someone say that … “Oh, I’m a penny out … I’ll just adjust it”. Well, without reconciling this difference, they would never really know if the bank was indeed reconciled. For a penny out one way, this could have been a grocery cheque you wrote for $99.68 that cleared the bank for $199.69, less a rebate deposit on your house natural gas account for $100.00

I often see businesses or persons just wanting to just adjust the missing $0.01 to bank charges.

I actually had a situation recently, where I was training a person in the monthly accounting process, which includes reconciling the company bank and posting the entries into their accounting system. This person was out $1.98. I insisted that this error was identified and fixed, and it took an extra hour and 10 minutes, of this person’s time and my time to find the mistake. Others might have just booked it to bank service charges, but not me.

I was training this person to reconcile the bank, not “PRETTY MUCH” reconcile the bank. I’m not trying to double my fees or cause your employee to be grumpy because he had to do a job over again.

Imagine if you have employees and are paying them to do something every month and they plug the difference everytime. In my experience, when employees start to plug one thing, it makes it a lot easier to plug in other places too (and I’m not talking about your toilets .. I mean with your inventory, petty cash fund, credit cards, etc etc). It will ultimately affect your bottom line.

But .. even as fun as it can be with reconciling your bank statement, this is the tip of the iceberg when it comes to accountants and bookkeepers and their RECONCILING adventures … especially with ….

  • accounts receivable and accounts payable lists – people like to charge interest, but not pay interest .. and
  • government sales tax and income tax account balances – arrears interest, penalties and timing differences
  • Take care.
    HART
    1800HART.com

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