CONTENTS                                                                          

Part 1 INTRODUCTION

Part 2 THE NATURE OF NUMBERS

Part 3 THE MYSTERY OF THE MISSING NUMBERS

Part 4 THE MYSTERY OF BANK RECONCILIATIONS

Part 5 RECONCILIATION METHODOLOGY -

          USING A RECONCILIATION MATRIX

Part 6 CONCLUSION

Part 7 PRACTICE PROBLEM

Part 8 FINIS

Part 9 POSTSCRIPT

INTRODUCTION

Why is it that so few people are able to reconcile their bank account or even appreciate the need to do so.  Possibly the answer can be found at least in part in the explanation of the difference between an analog and a digital computer.

It has been said that if a sweet young femme fatale sashayed through a computer room that a digital computer would describe her at 36/23/36.  An analog, on the other hand, would describe her as curved like an hourglass.  Digitals measure, analogs describe relationships.

It is my belief that each of us is part digital and part analog.  It has been my observation that those that are rigidly digital-dominant, find it easy and natural to be able to reconcile a bank account, but for the life of them cannot extrapolate meaning from a data base.  Conversely, those that are rigidly analog - dominant can't seem to do anything but extrapolate, and have little appreciation of what's involved in the underlying data - and are frequently quite wrong.

Heaven help those that are rigidly anything as they are forever doomed to live a life of multiple unsolved mysteries.  But there is hope for the less rigid and it is for them that this is being written.

Are your mental muscles feeling the stretch?

Let's try another easier one — calculate the approximate interest on a $10,000 loan -

·         at 12% for 90 days?  Obviously, $300.

(12% annual is 1% per month for 3 months, or $300)

·         at 18% for 60 days?  Also $300.

(18% is 1-1/2% per month for 2 months, or $300)

          at 9% for 90 days?  $225.

(We just solved 12% for 90 days with interest being $300, 9% is 3/4 of 12%, so the interest is 3/4 of $300 or $225.  Frequently, it is quicker and easier to solve problems using something that we already know, such as 12% being 1% per month, and then to improvise for the remainder.)  (A further way, 6% for 60 days is also 1%, so 6% for 90 days is 1-1/2% or $150, extrapolated to 9% is $225.)

This is all rather plebeian, but being able to do these kind of mental calculations is not only good mental exercise, but also could possibly save you from taking on an unintended interest obligation.

Also this kind of mental capability can provide a quick check on the reasonableness of the answers being ground-out by the computers or calculators.  These machines apply the rhythm of the numbers based on what we tell them.  And if we input a decimal point in the wrong place, the answer will probably be quite wrong.  Remember the old adage of "garbage in, garbage out."

In examining witnesses, lawyers are taught to avoid asking questions the answers to which they do not already know.  Similarly, one should not ask a computer or calculator to make a calculation the answer to which is not already reasonably known.

The calculators and computers are not the only producers of garbage.  We trap ourselves into mental errors by mixing the terms or units of measure, like $10 plus the outside temperature is supposed to mean something.  It means that we have some more garbage. 

But, for something more elusive —

All of the above may be quite obvious to some, but I don't believe it is generally appreciated.  It is important, however, and needs to be understood as it is the foundation of many aspects of operational control, to the understanding of business financial statements, and to the seemingly simple reconciliation of a bank account.

PART 4                                                     (Back to Top)

THE MYSTERY OF BANK RECONCILIATIONS

The term "bank reconciliation" is incomplete and should be called "bank balance reconciliation."  It is a reconciliation of (1) what the bank shows as your balance (what is owes you) and (2) what you show as to your balance in your checkbook (your record of how much of your money the bank is holding).  It is a reconciliation of balance to balance.

Why bother?  Because both you and the bank can make mistakes, and if you don't reconcile, you are at the bank's mercy.  It's a matter of the control of your money, the money for which you have labored.  Remember that a bank statement is their detailed accounting to you for their stewardship and what they did with your money.

Also, each of us from time to time may have a cash squeeze.  If we rely on a checkbook balance that has not been previously reconciled to the bank balance, we may be in for a shock and some embarrassment.  And, in today's environment, someone may have broken the code and may be processing bogus checks against your account.  Absent a reconciliation, you would know nothing about it until your checks start to bounce.

But, it is your money and it would seem that your level of interest should be more than casual or just acceptance.  On the other hand, if you don't care, please let the author know as he is considering setting up a bank to "take" care of depositors who don't care what the banks do with their money.  So you should have plenty of reasons to be concerned and want to learn how to make a bank reconciliation.

Galileo, the ancient mathematician and astronomer, once said, "You cannot teach a man anything; you can only help him find it within himself."  So, before proceeding, it is requested that you fight the tendency for your eyeballs to roll back and for a glazed pallor to overtake your countenance.  If you will do this, I will try to help you find it within yourself by showing you a more understandable and easier way to do a reconciliation.  Thank you.  Now to proceed...

Now, knowing the target, what is the problem - what is the mystery?  It is strictly one of timing.  Solving the mystery involves two sets of missing numbers: 

·      Items that you have recorded in your checkbook that the bank has not yet reflected on their bank statement, and 

·     Items that the bank has recorded in their bank statement that you have not yet recorded in your checkbook.

There is one other item that could be involved and that is the mathematical accuracy of your checkbook.  If there is an error in your addition or subtraction, that error becomes a reconciling item.  The banks are not insulated from making mistakes, some of which are the result of poor writing by the bank's customer.  The term "Banker's Accuracy," however, did not come about as a result of their being uncaring - they work diligently at being accurate.  But, they can make mistakes and their statements are their accounting to you as to what they have done with your money, including their undiscovered errors awaiting your discovery when you reconcile.  Thus, a further reason for the need for a monthly reconciliation.

As stated above, the reason there are differences between what you show in your checkbook and what the bank shows in their monthly statements is strictly a matter of timing.  If you were able to operate on a "real time basis," you would write a check and, somehow, it would be instantaneously recorded by the bank.  Under those circumstances, there would be no differences between your checkbook and the bank - no reconciling items.  Or, the bank would calculate your monthly service charge and when they recorded it at the end of the month, it would magically appear on your checkbook.  Again, no reconciling items.  Or, you record a deposit in your checkbook and the bank somehow or other simultaneously recorded it even though they didn't get the money until you got around to taking it to the bank.  If it could be done, there would be no reconciling items.

The world doesn't work that way.  You write a check which you deduct on your checkbook as it is written, but it doesn't get to the bank for several days or sometimes longer.  The bank charges you with a service charge at the end of the month which you learn about and put on your checkbook when you get their monthly statements.  Or, you record a deposit which doesn't get to the bank until after the "cut-off" date for the monthly statement.  These are the reasons for a difference between your checkbook and what the bank statements disclose - the differences are a matter of timing. Thus, the need for a reconciliation - to be certain that after considering the timing differences you and the bank are in agreement.

PART 5                                                    (Back to Top)

RECONCILIATION METHODOLOGY

USING A RECONCILIATION MATRIX

Now, to a bank balance reconciliation methodology using the Reconciliation Matrix.

To start off, you need to have the prior month's reconciliation at hand, as well as the current bank statement and your checkbook.  Following the "step-by-step" below should solve the reconciliation mystery.

The matrix is designed to facilitate getting quickly to the differences between the bank statement and your checkbook, which, when identified and agreed, are reconciled.  Don't get overwhelmed with the mass of details as it all boils down to what you had at the beginning, plus items going in less items coming out, equaling that at the end.

Examine the matrix itself shown on the next page.  It is composed of four columns - the reconciliation at the beginning of the period, a summary of your checkbook for the period, a summary of the bank's transactions for the period, and the reconciling items at the end of the period.

Each column starts off with the amount at the beginning, the amount of input, the amount of withdrawals, and the amount at the end.  This leads directly to solving for the three reconciling items in Column 4 labeled A. B., and C.  Then, at the bottom of the matrix, there is space for the details of A, B, and C.  That is really all there is to it.  Now, for a step-by-step example of its use.

1. The first step in using this matrix is to record the totals from your prior month's reconciliation in

   column 1.  The illustrative details are as follows:

 With this data recorded, the matrix would look like the following:

Note that Column 1 adds to "0" - a difference, plus or minus its elements, should equal zero and that the $153 is the difference between the beginning checkbook and bank balances which will see v  when they are recorded in the matrix in Columns 2 and 3.

The normal checkbook shows deposits and checks written, along with the balance, sequentially as they occur.  This step requires you to recap your checkbook into the format called for in the matrix - beginning balance, plus deposits, less checks for the ending balance.  This does two things: 1) it puts your checkbook data in the format of the bank's so that you can make direct comparisons, and 2) it is a proof of the ending balance.  If this recap produces the same ending balance as your checkbook, you have eliminated mathematical errors as a possible reconciling item.  If they are not the same, you need to find the error and correct it.

With this data recorded on the matrix, it would look like the following:

3. From the current bank statement, record the summary of their transactions

in column 3. Illustrative details are on next page.

b)      In this case, there were none.  The prior month's in-transit was picked up by the bank in the current month, and the deposits in the checkbook during he month were also processed by the bank during the month - so there were no in-transit at the end of the month.  If there were an in-transit amount, working backwards, these would generally be the last one or two deposits in your checkbook.  Record such detail of in-transit items in Box A (Intransits) at the bottom left of the matrix, indicating the details and the total - this will help you with next month's reconciliation.

At this point, I need to pause and ask that you return your eyeballs to the forward position and that you take three deep breaths to get some color back into your faces.  Now....

5.       Continuing with the missing number method to determine the ending outstanding checks.

a)      Starting with the outstanding checks in the prior period reconciliation (Column 1), add the checks written in the checkbook (Column 2), deduct the checks that cleared the bank (Column 3), and the remainder is the missing number for the current outstanding (Column 4).

b)      Then prove the outstanding number.  Inspect the current bank statement to see that the outstanding checks at the beginning of the month as shown in the prior month's reconciliation are all cleared - which they did and thus there are no prior month outstanding check carryovers.  Then inspect the current bank statement to see if there are any breaks in the check numbers sequence - Check 343 is missing so it is outstanding.  Also the last check number cleared by the bank is check number 345, so anything in the checkbook after that is outstanding.  Record the details and the total in Box B, at the bottom of the matrix.

Most banks reflect the checks being cleared in check number sequence in their bank statements and frequently make some coding such as an asterisk to indicate a break in the check number sequence.  This can be most helpful in establishing the outstanding check items - just look for the missing check numbers in the sequence and get the amount of each from your checkbook, or if it was voided.  The total of these should be the missing outstanding number.

6.       For other bank charges and credits determine the missing number and enter in Column 4.  There are generally only a few of these so compare the items recorded in your checkbook to the items in the bank statement and determine and document the missing number and by the items it represents.  Record this documentation in the detail section at the bottom right of the matrix.

a)      Bank charges include their service charges for which we frequently don't know the amounts involved until we get their statement.  Also, sometimes under the general category of "Charges" are ATM withdrawals, counter checks, etc. which really are the equivalent of your regular checks.  These should each be cross-referenced to a corresponding recording in your checkbook as they are potential reconciling items.

b)      Bank credits include interest as an example, but other than that, are infrequent.  Whatever they are, however, should be cross-referenced to a related item in the checkbook.  If they are not in both the bank statement and your checkbook, they are reconciling items.

7.       Lastly, cross check the difference between the ending balances of the checkbook and bank statement in Columns 2 and 3 to the total of the reconciling items in Column 4 - they should be the same, and if they are not, some further checking is needed.  However, if they are....

                                           IT IS DONE!  Almost.....

The difference between the two ending balances is $698.  This difference is composed of the items in Column 4, the details of which are at the bottom of the matrix.  The classical way of presenting a reconciliation, which is different from our matrix but presents the same thing, looks like the following:

8.      There is one more step - after the reconciliation is concluded, make whatever adjustments are called for from the reconciliation to correct your checkbook balance to the correct amount - in this case, the $22 bank service charge.

                                              NOW IT IS DONE!

PART 6                                                     (Back to Top)

CONCLUSION

The last page of this material is a blank matrix that you can reproduce for your use if you wish.  There are many ways of presenting a reconciliation, but to me a reconciliation should be made to be easy and fast, and thus the use of the missing number matrix concept along with the principle of exceptions to find the details.

For those who would like to test out their new-found knowledge before going to a live situation, a Practice Reconciliation problem is presented in Part 7.

In summary, a bank reconciliation involves the search for items in the bank statement not in your checkbook, and for items in your checkbook not on the bank statement, so as to determine the missing and reconciling items.  Then to display these reconciling items in a manner to complete the reconciliation by showing that the checkbook and bank are in agreement.  If you are not accustomed to the manipulation of numbers, a reconciliation may initially be an unfamiliar act.  But it isn't rocket science and with a little tenacity the unfamiliar can become familiar.  And if you got to this point in this writing, you certainly have the tenacity to make a reconciliation.

Also, at this point, you may roll your eyeballs back as far as you would like, but don't turn chalky and faint.  We were only looking at reconciliations, not E=MC².

The next page is a blank reconciliation form for use in making this test reconciliation.

S T O P!

DO NOT TURN PAGE UNTIL THE

6/30/XX TEST RECONCILIATION

IS COMPLETED

SOLUTION