Newbies, account setup and manual reconciliation

[Beth Leonard]

On Tue, Nov 15, 2005 at 10:34:20AM -0500, Derrick Hudson wrote:
> On Sat, Nov 12, 2005 at 03:34:33PM -0600, Jeff Smith wrote:
> | I've finally decided to get informed and take a more 'hands on' attitude
> | to our money management. Well, truth be told, I've finally decided to
> | actually start managing it, rather than just waving goodbye to it as it
> | flies out the door. :-)

I'd just like to add one thing to Derrick's great explanation:
Reconcilation.

Reconciliation is where you take your gnucash (or paper) view of the world
and make sure that it agrees with the bank's view of the world.  In
particular it's important to know where they differ.

Let's say at the end of last month, your bank sends you a statement
saying that you have $2000 in the account, and as far as you know
(because you've never kept close track before) that's the right
amount.

Now you buy a china hutch from your brother for $800 and write him a
check for $800.  In gnucash you fill out a line (by hand) right after
you write the check that says:

11/15/05 Check #151 China Hutch	Expenses:Home:Furniture $800 (withdrawl)

In theory, you now have $1200 in your account.  Gnucash knows that,
but your bank doesn't know that you've written that check for $800
until after your brother takes it to his bank to cash it.

Now let's say that your brother is rich and lazy.  He doesn't get around
to cashing the check until March.  At the end of November when your
bank sends you a statement saying how much money you have, they say
you still have $2000.  (Actually they probably say you have $2001.19
because you earned $1.19 on your interest-bearing checking account.)

Reconciling is what you do so that you avoid overspending at Christmas
and you don't bounce checks next March when your brother finally cashes
the $800 check.

Here's the nuts and bolts of doing it in gnucash (if you keep a
paper checkbook register, your bank will give you instructions on
how to do this on the back of the statement.)

1. Open your checking account window after you have downloaded and
imported your statement for the month of November.
2. Go to Actions->Reconcile.
3. On your paper statement, your bank will tell you what your ending
balance is.  Enter that number under "ending balance".  If you enter
your statement date, gnucash will try to take try to take a guess
at that ending balance, assuming all checks had been cashed.  In
this instance, gnucash's guess will be wrong.  For this example,
you'd enter $2001.19.
4. Next gnucash will give you a list of all unreconciled deposits
and withdrawls to/from the account.  For each one that also shows
up on your statement, put a checkmark next to it (for example,
the $1.19 in interest)  Don't put a check next to the $800 check,
because it's not on your paper statement.
5. When you're done, if everything is correct, the difference at
the bottom should be $0.00.  If it doesn't, you can either ignore
it, or hunt it down, depending on the magnitude of the error.
6. In March, after that check is cashed (and presumably included
in that downloaded statement) you can finally put a checkmark
next to that $800.  The reconcile window would likely show that
you're off by $800 now because you also subtracted $800 from your
account with downloaded statemnt.  You have to go in and delete
one of the two $800 transactions (either the one you added by
hand, or the bank's downloaded statement one) in order to get
your reconciled balance back to zero.

Basically reconciling is a way of carrying forward and remembering
every month that there's $800 in your account that isn't really
yours -- it could go away at any time.  It's also a way of making
sure the bank recorded everything correctly.  If you're already
trusting the bank to be correct by downloading the statements,
than it's less of an issue -- unless your bank is wrong.

I personally hunt all of the discrepencies down.  Once a
plumer cashed a check for $120.00 as $120.06 because the
handwriting was a bit sloppy.  I called the bank and they credited
the extra $.06 to my account.

I've put withdrawls in the deposit column by mistake and vice
versa.  If you're ever off by 2x the amount of a check, consider
that as a possibility.

Long ago I used to keep all of my credit card receipts and reconcile
(on paper) those receipts vs. the credit card statement as well, just
putting a check next to the correct amount on the statement.  I
gave that up when after 6 years and thousands of transactions, I'd
only found 3 errors -- all from the same restaurant within a 6 month
time period.  I just stopped eating at the restaurant.  The amounts
were all less than 30 cents in the restaurant's favor, but enough
to make me uncomfortable eating there, because looking at my receipt
there was absolutely no way the handwriting could have been mis-read.

Now, of course I'd never know if a restaurant was systematically
overcharging me.

Hmmm, maybe I should start adding the tip (or topping off at gas
stations) so that the total bill is always a multiple of 3, so that
I can spot check my statements more quickly, and I have a chance
of catching systematic fraud.

In essence, if you trust the bank's paper statements, and you
trust their downloaded statements to match the paper statements,
and you don't write outstanding checks, then you don't need to
reconcile.  Reconciling is all about catching errors, and at this
stage in your financial life, if it's too overwhelming it can
be skipped.

Good luck with your finances!  It's a touchy subject for just about
every couple.

--Beth 
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+                             Beth Leonard                          +
+       O say, does that star-spangled banner yet wave              +
+       O'er the land of the free and the home of the brave?        +
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