Checking Accounts and Reconciling a Bank Statement
Your first paycheck from a part-time job lands in your bank account on Friday. By Sunday you've swiped your debit card three times and written a check for a friend's birthday gift. How much money do you actually have? The number on your phone app and the number in your head might not match. By the end of this page you'll know how to track every dollar and prove that your records and the bank's records agree.
Types of accounts and the words you need
A checking account is built for spending. You deposit money, then use a debit card, checks, or electronic transfers to pay for things. A savings account is built for keeping money safe and earning interest. Two other options also exist: a money market account (usually a higher interest rate than savings, often with a higher minimum balance) and a certificate of deposit (CD) (you lock money away for a set term, such as 12 months, in exchange for a higher rate).
Here are the key words for checking:
| Term | Meaning |
|---|---|
| Deposit | Money added to the account (paycheck, cash, transfer in) |
| Withdrawal | Money taken out (ATM cash, debit purchase, check, transfer out) |
| Outstanding check | A check you wrote that has not yet been cashed, so the bank has not subtracted it |
| Deposit in transit | A deposit you made that the bank has not yet recorded |
| Overdraft | A payment larger than your balance, so the account goes negative |
Your money is protected. The FDIC insures deposits at banks, and the NCUA insures deposits at credit unions, each up to $\$250{,}000$ per depositor, per institution, per account category. If the bank fails, you still get your insured money back.
Define each of these checking account terms: deposit*, withdrawal*, outstanding check*, and overdraft*. Write one short sentence for each term.
Define each of these checking account terms: deposit, withdrawal, outstanding check, and overdraft. Write one short sentence for each term.
Fees, overdrafts, and choosing an account
Banks make money from fees, so read the fine print. Two common checking fees:
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Monthly maintenance fee (often $\$5$ to $\$15$). Avoid it with direct deposit, a minimum balance, or by choosing an account with no fee.
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Out-of-network ATM fee (often $\$2$ to $\$4$ from each bank, sometimes charged twice). Avoid it by using your bank's own ATMs or taking cash back at a store register.
Other fees include overdraft fees, paper statement fees, and fees for returned checks.
An overdraft happens when you spend more than your balance. If you opt in to overdraft coverage for debit card purchases, the bank approves the purchase and charges a fee (often about $\$35$) each time. If you opt out, the bank simply declines the purchase, usually with no fee. Checks and automatic bill payments can still overdraw, though.
To compare accounts, find the yearly net cost: yearly fees minus yearly interest. Interest on a checking account uses the APY (annual percentage yield), so interest $\approx$ balance $\times$ APY.
Name two common checking account fees and explain one way to avoid each. Then explain in one sentence how the main purpose of a savings account differs from that of a…
Name two common checking account fees and explain one way to avoid each. Then explain in one sentence how the main purpose of a savings account differs from that of a checking account.
Camila compares two checking accounts. Account A has a $\$12$ monthly fee, which is waived with a $\$1{,}500$ minimum balance, and pays no interest. Account B has no…
Camila compares two checking accounts. Account A has a $\$12$ monthly fee, which is waived with a $\$1{,}500$ minimum balance, and pays no interest. Account B has no monthly fee, pays $0.5\%$ APY, and charges a $\$34$ fee for each overdraft. Her balance is usually about $\$600$, and she overdraws twice a year. Find her yearly cost for each account and say which one is cheaper for her.
Marcus has $\$40$ in his checking account. In one day he makes debit card purchases of $\$25$, $\$18$, and $\$30$, in that order. His bank charges a $\$35…
Marcus has $\$40$ in his checking account. In one day he makes debit card purchases of $\$25$, $\$18$, and $\$30$, in that order. His bank charges a $\$35$ fee for each purchase that overdraws the account, and he has opted in to overdraft coverage. Find which purchases cause an overdraft, the total fees, and his ending balance. Then explain what would have happened if he had opted out. Argue which choice is better for him and describe two habits that would help him avoid overdrafts.
Camila has an average balance of $\$2{,}000$ and is choosing among three accounts. The traditional bank has a $\$10$ monthly fee and pays $0.01\%$ APY. The online bank…
Camila has an average balance of $\$2{,}000$ and is choosing among three accounts. The traditional bank has a $\$10$ monthly fee and pays $0.01\%$ APY. The online bank has no fee and pays $0.50\%$ APY, but she would pay $\$3$ for each of about 4 out-of-network ATM uses per month. The credit union has no fee with direct deposit, pays $0.25\%$ APY, and has free ATMs in its network. Find the yearly net cost or gain for each account. Recommend one account. In your answer, mention FDIC or NCUA insurance and convenience, not only cost.
The check register
A check register is your own running record of your account. Every time money moves, you write it down and update the balance:
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Deposit: new balance = old balance + deposit.
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Withdrawal, check, or debit purchase: new balance = old balance − amount.
| Date | Description | Payment (−) | Deposit (+) | Balance |
|---|---|---|---|---|
| 3/1 | Starting balance | \$600.00 | ||
| 3/3 | Check #101, Phone bill | \$55.00 | \$545.00 | |
| 3/5 | Paycheck | \$210.00 | \$755.00 | |
| 3/6 | Debit card, groceries | \$32.40 | \$722.60 |
Writing it down right away keeps you from spending money that isn't there. A banking app helps, but it may not show checks you wrote that haven't cleared.
Mia's check register shows a balance of $\$850.00$. She writes a check for $\$120.50$, makes a deposit of $\$300.00$, and pays $\$45.25$ with her debit card. Find her…
Mia's check register shows a balance of $\$850.00$. She writes a check for $\$120.50$, makes a deposit of $\$300.00$, and pays $\$45.25$ with her debit card. Find her new register balance.
Reconciling a bank statement
Each month the bank sends a statement listing every transaction it has processed. Reconciling means checking that your register and the statement agree. The two balances often differ for good reasons: timing (checks and deposits not yet processed) and items you haven't recorded yet (fees, interest).
The process has two sides.
Bank side:
$$\text{Adjusted bank balance} = \text{ending bank balance} + \text{deposits in transit} - \text{outstanding checks}$$Register side:
$$\text{Adjusted register balance} = \text{register balance} - \text{fees} + \text{interest earned}$$If you did everything right, the two adjusted balances are equal. Why? The bank side fixes what the bank hasn't seen yet, and the register side fixes what you haven't seen yet. After both fixes, both should show the true amount of money you own.
Ethan's bank statement shows an ending balance of $\$1{,}240$. He has two outstanding checks of $\$85$ and $\$130$ and a deposit in transit of $\$200$. His check…
Ethan's bank statement shows an ending balance of $\$1{,}240$. He has two outstanding checks of $\$85$ and $\$130$ and a deposit in transit of $\$200$. His check register shows a balance of $\$1{,}225$. Find his adjusted bank balance. Does it match the register balance?
Jayden's bank statement shows an ending balance of $\$512.40$. His check register shows $\$498.15$. The statement lists a monthly fee of $\$8.00…
Jayden's bank statement shows an ending balance of $\$512.40$. His check register shows $\$498.15$. The statement lists a monthly fee of $\$8.00$ that is not yet in his register. He also has one outstanding check for $\$22.25$. Reconcile the account. Do the adjusted balances agree?
Back to the start: your phone app, the bank's records, and your head may differ because of outstanding checks, pending deposits, and unrecorded fees. A register plus a monthly reconciliation tells you the true balance.