Balancing Act: How You and the Bank Use Your Account Balance

Your bank or financial institution keeps track of the balance in your accounts on a daily basis. In fact, with today’s availability of online banking, the bank computers can tell you minute by minute what your account balance is. They do this in response to additions and subtractions to your account.

Computing your average daily balance

An average daily balance is used by banks and credit card companies because the amount of money in an account (or the amount of money charged on a credit card) can fluctuate greatly from day to day or week to week. The bank would prefer that you have approximately the same amount of money in your account throughout the month so that it can accommodate business transactions and lend more easily. But the reality is that businesses need cash to pay bills and employees at certain times of the month; so those payment times may not coincide with the revenue deposits.

Determining interest using your daily balance

The interest earned on money in your account usually accrues for a certain amount of time — for a month or three months, for example — and then that interest is credited to your account as a deposit. To determine the amount of interest earned daily (or over several days, when your balance stays the same for a while), you have to divvy up the stated interest rate into a daily amount.

Reconciling Your Account

All bank accounts that you put money into (deposits and interest, for example) and that you withdraw from, need to be reconciled. Reconciling you’re checking or savings account means that you’re performing an audit or check of over a particular time period. The word reconciles literally means to bring into agreement or harmony — to make compatible or consistent. So, in other words, you want the money in the account to agree with what you think should be there.

Reconciling isn’t a critical factor when it comes to stable accounts such as CDs, which are primarily accruing interest. However, checking accounts (and some savings accounts), which see a lot of regular action need to be reconciled on a daily or weekly basis. The following sections show you how to go about reconciling your account and correcting errors when you find them.

Making reconciliation simple

To reconcile your banking records, you need the statement from the bank and you need your own accounting records, such as a checkbook register or other bookkeeping device. It also helps to have a good head for numbers (or a calculator if you don’t number savvy). Your bank statement will likely list your current balance, transactions during the previous time period (usually a month), and other tidbits of information, such as average balance, a numerical listing of cleared checks, and postings of fees and interest

Last word

Most bank statements include forms on the back that you can use for your reconciliation computation. To actually compute the reconciliation, you need to add up all the outstanding checks or other debits (those that haven’t yet been cleared by the bank), and then you add up all deposits not shown on the statement.

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