Checkbook Skills

 
[ Managing a checkbook ]
[ Why a checkbook? ]
[ how ]
[ reconciliation ]
[ Pre-allocation accounting (Accrual accounting), and a modification of it that makes it work ]
[[ Accrual's pluses: ]]
[[ Accrual's defects: ]]
[ Solution to Accrual (Modified Accrual or Pre-Allocation Accounting for lack of better name, solution to balance bouncing): ]
[ glossary ]

Managing a checkbook

a bank balance of more than 0 is not proof you can buy buy buy. it only means that currently, there is money in the bank. items that have been sent off and not posted to the account can cause the bank balance to bounce if the register's balance goes below (or at) $0. to prevent this, use Accrual? accounting which pre-allocates periodic debit (regularly occurring) items like utility bills, phone bills, pay vouchers, and the like. in accrual, entering an income that has not posted yet can cause massive problems.

Why a checkbook?

  • It helps keep you from expensive overdrafts. if you do it right, it will keep you from overdrafts and from having to check your balance at the bank all the time at every transaction and always worrying.

  • How the whole idea works: the checkbook is a virtual bank account that tries its best to parallel your real bank account.
  • A check register fixes a problem your real bank account hides from you - it takes TIME for a deposit to get into the bank and become "posted" (the money actually put into your account). It takes even more TIME  for a check to be "cleared" (the money actually taken from the bank) - it can be as much as 2 weeks or a month. If you look at the bank's balance and trust it, those uncleared checks may get subtracted from your bank account on the day that you planned to make that big purchase or pay that big bill.
  • When the check does clear, the bank account can go negative - a bad thing for your credit rating. All because of time delays.  Some checks may not clear for several months.
  • The solution - a check register: you keep track of all income and outgoes, including the 'extra' stuff (like bank charges & ordering checks). Anything that affects your real bank account is what you put in your check register. No more surprises, unless you add or subtract wrong, or misread an amount.
  • Pre-allocation of regular bills style of accounting () can solve some problems like overdraft fees, but cause problems when the balance needs adjustment or during a reconcile.

how

Most checkbook 'registers' have a little set of instructions on the front on how to use it. I like using 2 lines for each entry, so I have at-a-glance documentation of what's been going on.

Spreadsheets are great for checking the correctness of your balances (so are programs like Quicken & Microsoft Money). =C1+B2-A2 is a good formula for the balance column. Put in the following, and we'll assume you have $1000 balance to start.

  A B C D
1 check# payment deposit $1000
2       =D1+C2-B2
3       =D2+C3-B3
4       =D3+C4-B4


Here you take the balance from the line above it, add the amount of the deposit(credit), subtract any payments(debits), and put the total in the 'Balance' box (the rightmost column) on the same line.
Once you've typed the formula in D2, hit the Enter↵ key. this will put the formula in and it will automatically update with the new value from the equation. click on D2.

Now we need copies. Drag the lower right corner of the cell selection down about a screenful of cells. it's OK if it scrolls a lot. let go of the mouse.
Now we need to go back to the top of the spreadsheet. There are 2 ways to do it. Hold down the Ctrl key (lower left side of the keyboard) and hit the HOME key (above the 4 plain arrow keys). This will take you to the top of the spreadsheet.
You can also use the mouse to go to the top of the spreadsheet by dragging the scrollbar up to the top.

You are done. Now just fill in check stuff and the balances will be calculated for you. If you mis-type something, or you missed an item, your electronic balance will show it when you compare it to your check register. It could also show a problem with your check register.

The biggest mistakes on check registers are:
  • Forgetting to put in items — checks, deposits, ATM items & fees, monthly bank charges on your account, bank fees, monthly bank interest.
  • Putting amounts in the wrong column - such as a deposit listed in the payment/debit column, or putting a check in the deposit column.
  • Double entries: Putting an entry in twice, possibly on different pages.
  • trusting the balance on the ATM slip (can be 3 days off) - checks may not have cleared since the ATM got news of the balance.
  • trusting the balance on your monthly bank statement.
  • entering in $20 ATM's twice - the solution is to put down the little unique ATM transaction or semaphore numbers on the slip (about 4-8 digits) onto the check register, and mark the ATM so you know it's already been put into the check register.

Check# Date Description of Transaction Payment/Debit(−) Code Fee(−) Deposit/Credit(+) BALANCE:600
1234
2/12
Glingko Apartments
rent
550
      50
  2/12 Zipcoco company pay       2000 2050
  2/12
ATM withdrawal #12345
groceries for work
21.50
      2028.50

What is shown here is a little check register, filled out.

The balance column shows the total amount you really have in your bank, AFTER an items has been added or subtracted.  You can't see the line above check#1234, but if you could, the balance would be $650.
After making a $550 payment for the rent with check#1234, $100 is left, and that has been put in the balance column ($650 − $550 = $100).
Then, a paycheck came in, $2000, and this was added to the balance ($100 + $2000 = $2100).
Then a trip to a bank machine (ATM), a withdrawal of $20 was made, with $1.50 charge from the machine (ugh), leaving $2078.50 in our 'virtual bank' (check register).

Pre-allocation accounting (Accrual accounting), and a modification of it that makes it work

Accrual cannot currently be used in Business accounts because the balance on accrued income makes the balance falsely look spendable.

regularly occurring income should not be Entered into the check register until it has posted to the bank account.

a bank balance of more than 0 is not proof you can buy buy buy. it only means that currently, there is money in the bank. items that have been sent off and not posted to the account can cause the bank balance to bounce if the register's balance goes below (or at) $0. to prevent this, use Accrual accounting which pre-allocates periodic debit (regularly occurring) items like utility bills, phone bills, pay vouchers, and the like. in accrual, entering an income that has not posted yet can cause massive problems and would cause the account to be a false positive (+), and dipping into the account might cause a bounce of the debit item's amount.

the difference between normal accounting and Accrual is that any recurring bills would normally be written down with just an amount in the check register without the check number or date (or you can fill in with both date, check number, and amount, write out the check, and take the check out of the checkbook when the bill comes due). When an accrued (preppaid) is cleared from the reconciliation, it is simply deleted. on a piece of paper, to cancel, a debit amount would have a copy listed under credit as in normal accounting. when a check is posted in Accrual Acounting, lacking details are simply filled in. on that line, which is above on the register, so look upward in the register 1 or more pages.

the reconcile.xls I have is sufficient for reconciliation of Accrual, but the tax man probably won't accept it (or be dumbfounded).

reconcile.xls for Accrual's difference from regular accounting is that pre-allocated amounts which have not been posted should be placed in along with other unposted items.

Accrual's pluses:

  • it's a help to prevent the need of bankruptcy proceedings, by pre-allocating expenses/debit/checks/withdrawals/transfers-out that is less than balance-minimumBalance.
  • it prevents living by checking the account balance once per transaction or more. takes the scare out.
  • the nice thing about Modified Accrual Accounting (for lack of a better name) is that no changes are required to current and later income entries after the transition date from Accrual except in the making of an income entry (post rather than when planned). so only the software and methodology changes a little, and it's easy to get used to.

Accrual's defects:

  • does not work for unposted/accrued income/credit/deposit (regularly occurring income/credit/deposit entries) because the deposit has not been posted yet to the balance. so the balance is false if you post an income and could bounce if you spend deposit/credit/income*numberOfTimes-balance-minimumBalance amount of cash. that's the danger.
    "Accrual's got danger lurking in its deposit." (mnemonic) or "Accrual dangerous deposit."
  • does not work in a business model without modification because of balance bouncing because revenues are recorded when incurred, not when they are posted. Accrual would work wonderfully if revenues were only recorded when posted and expenses when incurred or posted. This results in a safer balance.
  • reconciliation is slightly more difficult, especially more difficult when account refuses to reconcile - sometimes a balance adjustment is required. in reconcile.xls, there is an adjust-by amount you use, which for deposit/credit(+) is the equation OffBy=EndingBankBal+OutstandingDeposits-OutstandingPayments-RegisterBal
  • you cannot plan for income multiple times in advance. that times many as a false positive addition to the existing balance.

Solution to Accrual (Modified Accrual or Pre-Allocation Accounting for lack of better name):

  • record income when posted only, not planned - no future stuff please or balance could bounce)
  • record expenses when planned for or posted (you should be able to do both), but only if I know that I can only spend a maximum of balance-minimumBalance (this means that expense is less than or equal to balance-minimumBalance).
  • a planned purchase can have its date and check number back-filled in later (you would have to look upwards in the check register to find the recorded entry and fill in the blanks after you have written a check for the transaction. which results in:
  • NOTE: A new or replacement column for "Post Date" is needed in the standard check register forms. You could use instead the 2 columns for posted+fee for Post Date, it makes for more accurate Reconciliation and you know in what month/statment it posted.
  • if the planned expense amount turned out to be incorrect, you:
    • adjust for it with a new adjustment entry to make the correction to the original amount with the adjustment being the difference of the expenditure in the debit column, or you can
    • credit the original amount to cancel out the original item with same check number filled in for both and same date and write new correct entry as a posted amount.
  • Standard reconciliation method

reconciliation

You should reconcile your checkbook every month with the ending balance that the bank shows. The bank includes a sheet on the back of your statement to reconcile your check register. Hopefully you get a paper statement to reconcile with.

You sum up all your check register items that don't show up in your bank statement (checks/debits/ATM-withdrawals) and that is set as one calculation. Your deposits are another calculation. You also factor in the bank balance from the statement, and the balance from your check register (you should keep that current). I have a javascript-driven reconcile program/web page here, or you can download this reconcile.xls Excel Spreadsheet, which is simpler to use. Also, there is a little convenient reconciliation form on the back of most check statements, where you can do the calculations yourself. If it is not big enough, just take the general concept into practice and come up with your own, just make sure it works the same.

if you were to try to reconcile based on your online register, people don't usually do that and most consider it a mistake, but it is do-able. you can do that of course, it just means that you have to go by that online bank balance as an ending balance rather than using the paper one, and you would also use the online list of items to check off (print it out). be warned, however, that it messes you up for next month's reconciling, because you will be re-counting some of the items twice... You would need to make sure you don't count those items a 2nd time when your next statement comes by going through and comparing both lists.

Every once in a while you find that you have made a mistake on your check register way up above. I usually resolve this by making notes on the wrong entry and by also making similar notes in an adjustment entry at the bottom of the check register.

  • If you put a deposit in the payment/debit column by mistake, it will show up in your reconciliation as a check register balance being off in the negative direction by double the amount of the deposit. You should make an adjustment by putting double the amount of the deposit in the deposit/credit column.
  • If you put a check/atm in the deposit/credit column by mistake, it will show up in your reconciliation as a check register balance being off in the positive direction by double the amount of the check. you should make an adjustment by putting double the amount of the check/debit/atm in the payment/debit column. then it is probably a good idea to check your bank balance!
  • if you enter an item with the wrong amount, it will differ from your statement, and it will show up as a difference in your reconciliation balance.
  • WARNING: If you pre-allocate for debits/withdrawls/checks/transfers-out, make sure you do not pre-allocate for income/credits/transfers-in because it will cause your balance to bounce. Why? if you try to spend that money, it's not going to be in the bank yet, is it? no, it's not because that amount is not posted yet. so until then it's a false positive. it's OK to pre-cllocate for debits, because they reduce your balance and you can make sure your "new" balance does not down too far even though the money has not been spent yet. that is wise spending and it keeps you safe from mistakes just make sure you pre-allocate properly every time period like every paycheck (month? 2 weeks? week?).

for example:

Check# Date Description of Transaction Payment/Debit(−) Code Fee(−) Deposit/Credit(+) BALANCE:600
1234 2/12 Glingko Apartments
rent
      550 50
made adjustment below
  2/12 Zipcoco company pay 2000       -1950
made adjustment below
  2/12 ATM withdrawal #12345
groceries for work
21.50       -1971.50
1234
2/12
Glingko Apartments
rent
1100    
-3071.50
adjustment for above
  2/12 Zipcoco company pay       4000 928.5
adjustment for above

glossary

item
checkbook transaction. an entry in the checkbook.
posted:
checks that have cleared the bank.
debit column:
payment column
credit column:
deposit column
check register:
a recordbook you ask for from your bank (it's free), which allows you to record your transaction date, description, payment amount, whether it was posted (checkmark), fee, deposit amount, and the current balance. the current balance is not your bank balance! it is the money you have left after you have written checks. this is your "real" balance. this balance tells you, if the bank were to suddenly post all of your transactions, how much you would have in the bank! This is why we have a check register. it's so we avoid overdrafts (our bank account going negative, and the associated $35 charges when the account goes negative or another transaction posts).
check register wallet:
a vinyl (plastic) holder for your check register with flaps thick enough to prevent writethrough (a condition where writing on one check writes through to the next check, maybe a third check, and so on, if you are using duplicate checks). it also protects it and makes it easy to identify, and holds your checks below (the big flap), and check register above. these are free from your bank, you just ask for one.
Overdrafts:
it's about $35-$100 when the account goes negative or another transaction tried to post. it's what banks charge you when your account goes negative. this is something youwant to avoid because the costs get high fast.
checkbook/check register reconciliation.
this takes your bank's balance from your last statement, your current balance from your check register, and your outstanding items (items that have not been listed in any of your bank statements), and figures out if the result is zero ($0). if it is, congratulations, you have reconciled your account for this month. you should do this every month. If it does not reconcile, try to find the items that are missing or were entered incorrectly. you may have also calculated your checkbook balance incorrectly (it happens) - you can check it with a simple spreadsheet that subtracts one column and adds the next column from the previous balance and stores the result in the current balance. then copy that formula down about 200 or 300 rows and you are set.=D3+C4-B4 where b column is payment, c column is deposit, and d column is balance, just like in your check register. the top balance number is your starting balance, for instance, from the start of the last reconciled month or if you have never reconciled, your first statement. You may have to make an adjustment to your balance by some amount.