Bank Accounts and Accounting: A General Overview

Nobody is thrilled when they get their monthly bank statement. Whether the balance shown is negative, less than expected, or the account just needs to be reconciled, it’s a time almost everyone would like to avoid. Why? I think the greatest contributor to this attitude: we simply do not know enough about banking, reconciling, and account management to look forward to this task.

What if you did have more experience, more training, and you were pretty sure your balance was accurate; would you look forward to the task then? Maybe not, but you might not dread the thought so much.

Here, we’re going to discuss bank accounts, and hopefully provide greater insight as to the purpose, the individual transactions, and the reason for reconciliation. Often, we avoid a task because we don’t fully understand how and why it works. So, let’s take a tour of the personal bank account, beginning to end.

When you open a bank checking account, you’re given a check register and several starter checks. But that’s not all that you’re given. You’re also given an opportunity to responsibly manage your finances, in a way that is closely related to business and accounting.

When you deposit money into your checking account, and then write a check, you have created financial transactions known as debits and credits. Successfully managing a bank account and tracking these transactions gives us a better picture of where and when we’re spending our money. This is the purpose of the bank accounts, more specifically the checking account. Savings accounts are used to provide a means of saving money in an account that allows us to track deposits and withdrawals.

The individual transactions, as stated above, are known as debit and credits. These are accounting terms, but they apply to every type of financial transaction that takes place; regardless of the account type, the transactions are always known as debits and credits. Accurate recordkeeping of these transactions may make the reconciliation of the account much easier, and more easily understood. In a check register, the debits are referred to as deposits, and the credits are referred to as payments. Whenever you write a check, you are making a payment. Whenever you put money into the account at the bank, you are making a deposit.

Accounting uses cycles to determine when to start and stop a particular set of records. In the banking industry, the cycle is monthly. So, every month you get a statement of your account. This statement is known as your bank statement, and accurate reconciliation of this account information will serve to keep you informed of your account balance, in your checkbook and at the bank.

Many times, reconciliation is overlooked, or simply not done. Over a year’s time, there can be many discrepancies, and this can lead to an overdrawn account. Reconciling your account isn’t that difficult, you simply check your records against those of the bank, enter any service charges, and correct any addition or subtraction errors in your register.

As you can see, the process is really quite simple, we just need to have a better understanding of what, why, when, where, and how. Once equipped with those tools, the job is always much easier.

Categories Accounting, Banking

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