Newbies, account setup and manual reconciliation

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Newbies, account setup and manual reconciliation

Jeff Smith-5
Okay, when it comes to accounting I'm about as newbie as they come. You
have been warned. Neither my wife nor I are what you might call
accounting savants. For years, money has been the basis of heated
marital discussion but neither one of us is an authority, so the
arguments just go round and round.

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've followed the various tutorials and hand-holding guides and got what
I think is a reasonable chart of accounts drawn up, and I've imported
about 18 months of available online banking history. (I hate paying
debit fees, but I love the granularity the age of debit-cards has
brought to my spending history.)

There is one area, however, that still befuddles me: Credit cards. I
have a category of liabilities called "Credit Cards", under which I have
a separate account for each card we have. In my checking account
register, I have transfers to those credit card accounts for each
payment made. These transfers show up in my QIF files from the checking
account. So far so good.

I am also downloading QIF statements from my credit card company, which
gives me all my granular transactions. Nifty. But I'm confused. At the
moment, I'm posting those credit card QIFs to the same gnucash account
that I transfer the payments to. The individual transactions get
allocated to my various expense accounts (food, toys, clothing etc.)

But I don't understand the accounting principles involved clearly enough
to be sure how the accounts SHOULD be set up. Do I just post all these
transactions to the credit card liability account? Or should I set up
individual "bank accounts" for each card, and transfer money from those
accounts to the categorized expense accounts for each transaction?

Any direction on the best way to manage this would be most welcome.

On another issue, is there a manual way to declare two records in the
system as "matching records" as a sort of manual reconciliation? There
are times when I'm importing records that I forget that a payment in the
credit card QIF should be matched to an outgoing transaction from my
checking account. So I end up with what appears to be a double payment.
What is the correct way AFTER doing the QIF import to fix these and tell
the system that they are two reports of the same transaction?

--
Jeff Smith


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Liz
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Re: Newbies, account setup and manual reconciliation

Liz
On Sun, 13 Nov 2005 08:34, Jeff Smith wrote:

> But I don't understand the accounting principles involved clearly enough
> to be sure how the accounts SHOULD be set up. Do I just post all these
> transactions to the credit card liability account? Or should I set up
> individual "bank accounts" for each card, and transfer money from those
> accounts to the categorized expense accounts for each transaction?
Each card needs its own account. You can make them quite separate or put them
under a 'top-level' account called Credit Cards. (Or you could get rid of all
but one, which might help stop the money flying out the door).

>
> Any direction on the best way to manage this would be most welcome.
>
> On another issue, is there a manual way to declare two records in the
> system as "matching records" as a sort of manual reconciliation? There
> are times when I'm importing records that I forget that a payment in the
> credit card QIF should be matched to an outgoing transaction from my
> checking account. So I end up with what appears to be a double payment.
> What is the correct way AFTER doing the QIF import to fix these and tell
> the system that they are two reports of the same transaction?
Dunno what the correct way is, but I delete duplicate transactions.

LIz

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Re: Newbies, account setup and manual reconciliation

Andrew Sackville-West
In reply to this post by Jeff Smith-5


Jeff Smith wrote:
> Okay, when it comes to accounting I'm about as newbie as they come. You
> have been warned. Neither my wife nor I are what you might call
> accounting savants. For years, money has been the basis of heated
> marital discussion but neither one of us is an authority, so the
> arguments just go round and round.

welcome to MY life...

>
> But I don't understand the accounting principles involved clearly enough
> to be sure how the accounts SHOULD be set up. Do I just post all these
> transactions to the credit card liability account? Or should I set up
> individual "bank accounts" for each card, and transfer money from those
> accounts to the categorized expense accounts for each transaction?

As a good starting point, your accounting should mimic life as closely
as possible. So if you have multiple credit cards then you should have
multiple CCard type liability accounts. Whether you choose to group them
under one "master" account for all credit cards or not is really up to
you. Try it one way, and if you don't like it, you can change it later.

Any exepnses that you pay with your credit card (groceries, travel,
whatever) are just like paying with your bank account debit card EXCEPT
-- instead of lowering the value of your bank account, it raises the
value of your ccard liability. The subsequent payment from bank to ccard
lowers the bank account value and lowers the ccard liability. Note here,
and this I think is where a lot of people get confused, that lowering a
liability is "raising" a negative number -- moving closer to positive
territory... ahhh... someday...

>
> Any direction on the best way to manage this would be most welcome.
>
> On another issue, is there a manual way to declare two records in the
> system as "matching records" as a sort of manual reconciliation? There
> are times when I'm importing records that I forget that a payment in the
> credit card QIF should be matched to an outgoing transaction from my
> checking account. So I end up with what appears to be a double payment.
> What is the correct way AFTER doing the QIF import to fix these and tell
> the system that they are two reports of the same transaction?

just delete one of two. doesn't matter which. they are doing the same
thing and are simply duplicates. If you like the notation that comes
from the bank then keep that one. If you prefer it as you have entered
it then keep that one. simple.

IANAA

Andrew
>
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Re: Newbies, account setup and manual reconciliation

Derrick Hudson
In reply to this post by Jeff Smith-5
On Sat, Nov 12, 2005 at 03:34:33PM -0600, Jeff Smith wrote:
| Okay, when it comes to accounting I'm about as newbie as they come. You
| have been warned. Neither my wife nor I are what you might call
| accounting savants. For years, money has been the basis of heated
| marital discussion but neither one of us is an authority, so the
| arguments just go round and round.
|
| 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. :-)

That sounds like a good plan.  Studies indicate that finances is one
of the top two marital issues.


| There is one area, however, that still befuddles me: Credit cards. I
| have a category of liabilities called "Credit Cards", under which I have
| a separate account for each card we have. In my checking account
| register, I have transfers to those credit card accounts for each
| payment made. These transfers show up in my QIF files from the checking
| account. So far so good.
|
| I am also downloading QIF statements from my credit card company, which
| gives me all my granular transactions. Nifty. But I'm confused. At the
| moment, I'm posting those credit card QIFs to the same gnucash account
| that I transfer the payments to. The individual transactions get
| allocated to my various expense accounts (food, toys, clothing etc.)

| But I don't understand the accounting principles involved clearly enough
| to be sure how the accounts SHOULD be set up. Do I just post all these
| transactions to the credit card liability account? Or should I set up
| individual "bank accounts" for each card, and transfer money from those
| accounts to the categorized expense accounts for each transaction?
|
| Any direction on the best way to manage this would be most welcome.

I've never looked at the way a bank or credit card provides the
information, nor do I have any formal accounting training.  However, I
think I've figured out a few things so hopefully I can explain them
well to you.

There are two purposes to accounting.  One is to know what money you
do and don't have, the other is to know where you get money from and
where it goes to.  The former are Assets and Liabilities, the latter
are Income and Expenses.

Assets are things like your bank accounts, investment accounts, and
even your house and car (paypal too).  Liabilities are your credit
cards and loans.  In gnucash, these accounts should match the accounts
you actually have.  Create one account for each account at the bank
and create one account for each credit card.

Income is, naturally, your paycheck.  You may have just one income
account if you have one job, or you may have more if you have more
jobs or other sources of income.  If you sell a lot of stuff on eBay,
for example, you may want to make an "income" account to represent
that.  In practice, the income accounts should reflect the
categorizations you are interested in seeing.  Expenses are nothing
more than categorizations for the things you spend money on.  You
could just have one expense account if that is the level of detail you
want, or you could have many dozens.


The key to understanding account types is to know how they are used.
The accounts themselves don't have much meaning by themselves.  Their
importance is how they are handled by the reports.  The reports are
only useful to the extent that they answer the questions you have.
For example "how much money do I have?"  "how much do I owe?"  "how
much did I spend this month/year/whatever?"  "how much did I spend on
food, gas, entertainment, fees, etc.?"

Any report that focuses on what you do and don't have only considers
the Asset and Liability type accounts.  Any report that focuses on
flow -- where the money came from and went to -- only considers Income
and Expense type accounts.



To demonstrate how these principles are applied, let's walk through a
simplified month.  In this month you will not be paid;  you will buy
food once with a credit card and then you will pay that bill.

Note that I will demonstrate the practice of double-entry accounting.
It really isn't complicated once you see how the pieces work together
and it provides advantages over single-entry accounting.  I'll also
use the informal column labels gnucash provides instead of the formal
debit/credit labels used in the industry.  (I only learned the right
meaning of debit/credit recently and the example will be simpler, I
think, not using them at this time)


So we have the first transaction -- buying food.  This transaction
will have two splits:
    1)  account: Expenses.Food,     expense: $20
    2)  account: Liabilities.VISA,              charge: $20
A basic principle in double-entry accounting is that the total of the
transaction is $0.  As one document put it "money is neither created
nor destroyed, it is only transferred".  This provides a sanity check
that you haven't entered something incorrectly.  So far so good -- we
spent the $20 on food.  The account totals show that you owe VISA $20.
At this point, the Net Worth report will show your liability
increasing and the net decreasing by $20.  So far your assets are the
same -- you haven't taken any money out of the bank yet.

Now we have the second transaction.  The credit card bill came, with a
balance of $20 as our account shows, and we will pay it by writing a
check.  This transaction also has two splits:
    1)  account: Liabilities.VISA,  payment: $20
    2)  account: Assets.Checking,           decrease: $20
This transaction records the writing of the check to pay the credit
card.  If you look at the Net Worth report you'll see that this
transaction doesn't affect your net worth.  You already spent the
money at the store long before writing the check.

Of course you can have more splits on any given transaction.  Suppose
you go to a department store and you buy food and clothes.  Or food,
clothes, and a movie rental.  You would have one split showing the
charge on your credit card, and three splits showing the expenses for
food, clothes, and entertainment.  Of course, that is assuming you
want to track each of those expenses as a separate category.


Based on your description I think you have the right idea.  The credit
card account tracks the activity that is reflected in your monthly
statement.  This activity consists of spending money and paying the
bill.  The spending money actions are connected to expense accounts
and paying the bill is connected to an asset account.


I think the only non-intuitive part of this picture is that many
transactions will increase both account totals.  When you are paid,
your income total increases and so does your bank account.  When you
buy something, the expense increases and so does the credit card
balance.  The explanation is in how the accounts are used.  An income
or expense account does not have any effect on your net worth or total
assets.  Receiving the paycheck really only affects the report of your
total income, not your total assets.  Depositing the paycheck in your
bank account (or recording it as 'cash') is what increases your total
assets and net worth.  Similarly, paying the credit card bill
decreases the account total for both your checking account and the
credit card.  This is because the credit card is a liability, and thus
the number is essentially a negative number:  it's money you don't
have.  By decreasing that number you are decreasing the amount you owe
and thus increasing your net worth.


Does this make sense or am I creating additional confusion?

-D

--
The righteous hate what is false,
but the wicked bring shame and disgrace.
        Proverbs 13:5
 
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Re: Newbies, account setup and manual reconciliation

Jeff Smith-5
In reply to this post by Andrew Sackville-West
On one point, it appears I wasn't very clear in my original posting.
Yes, I have a separate credit card account set up for each of the cards
I have. And they are in fact grouped under a common parent, called
Credit Cards. (In looking back at my posting, I was using the singular
case when referring to the credit card accounts, rather than the plural.
Hence the confusion.)

The suggestion that I should just delete one of the two records
reporting the payment is probably the best way to go.

In the future, should I be flagging these redundant transactions as
"reconciliation" records, or just ignore them completely? Does it matter
which way I go?

--
Jeff Smith
Computer Science Dept.
University of Saskatchewan
http://jefficus.usask.ca
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Re: Newbies, account setup and manual reconciliation

Andrew Sackville-West


Jeff Smith wrote:

>
> In the future, should I be flagging these redundant transactions as
> "reconciliation" records, or just ignore them completely? Does it matter
> which way I go?
>
I'm not sure what you mean by this. I assume you are manually entering a
transaction when you pay your bill. Then later, when you download
transactions, you get a duplicate of that transaction. Either one of
these could be deleted. Reconciliation is unrelated. when you reconcile,
you will mark whichever of these transactions is left. That is, when you
  check off the transaction on your statement, you will check off the
matching one in the account in gnucash. that's all there is to it. what
am I missing in your question?

A
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Re: Newbies, account setup and manual reconciliation

Glenn English
In reply to this post by Jeff Smith-5
On Tue, 2005-11-15 at 12:50 -0600, Jeff Smith wrote:

> In the future, should I be flagging these redundant transactions as
> "reconciliation" records, or just ignore them completely? Does it matter
> which way I go?

The purpose of accounting is just what it says: to account for the money
flowing through your life. The picture of your $$ that gnucash presents
in its registers and reports is supposed to be true.

If you have duplicate entries in the system, that picture is false --
you didn't really pay the credit card bill twice, so you have garbage
in.

Once one of them is deleted, the picture is true again, so the one
remaining needs to be treated like any other transaction. It really
happened, so it has to be considered in the reconciliation. If it isn't,
the picture becomes false again because the transaction has gone through
the bank and been reported in the bank statement.

Reconciling is nothing more than synchronizing a piece of gnucash's view
of your money with the bank's. The statement is just the bank's opinion
of what happened recently.

--
Glenn English
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GPG ID: D0D7FF20

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Re: Newbies, account setup and manual reconciliation

Jeff Smith-5
In reply to this post by Andrew Sackville-West
Jeff Smith wrote:
 >> In the future, should I be flagging these redundant transactions as
 >> "reconciliation" records, or just ignore them completely? Does it
 >> matter which way I go?

Andrew Sackville-West wrote:
> I'm not sure what you mean by this. I assume you are manually entering a
> transaction when you pay your bill. Then later, when you download
> transactions, you get a duplicate of that transaction. Either one of
> these could be deleted. Reconciliation is unrelated. when you reconcile,
> you will mark whichever of these transactions is left. That is, when you
>  check off the transaction on your statement, you will check off the
> matching one in the account in gnucash. that's all there is to it. what
> am I missing in your question?

Actually, I don't do manual entries. At the end of each month, I
download the transaction records from my bank. Each month includes a
record of a payment to a credit card. (Call this the bank's record.)
Then, I download a set of transactions from my credit card company. 2 or
3 days after my bank shows the payment, my credit card company shows a
corresponding receipt of funds, which I will call the card's record.
(Why they don't show up on the same day is a matter for banking politics.)

So now I have two records of the same transaction, from both sides of
the fence. I was thinking that card's record should be treated simply as
a reconciling entry to match against the bank's record. Or am I missing
something?

--
Jeff Smith
Computer Science Dept.
University of Saskatchewan
http://jefficus.usask.ca
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Re: Newbies, account setup and manual reconciliation

Derrick Hudson
On Tue, Nov 15, 2005 at 02:22:22PM -0600, Jeff Smith wrote:
| Jeff Smith wrote:
| >> In the future, should I be flagging these redundant transactions as
| >> "reconciliation" records, or just ignore them completely? Does it
| >> matter which way I go?
|
| Andrew Sackville-West wrote:
| >I'm not sure what you mean by this. I assume you are manually entering a
| >transaction when you pay your bill. Then later, when you download
| >transactions, you get a duplicate of that transaction. Either one of
| >these could be deleted. Reconciliation is unrelated. when you reconcile,
| >you will mark whichever of these transactions is left. That is, when you
| > check off the transaction on your statement, you will check off the
| >matching one in the account in gnucash. that's all there is to it. what
| >am I missing in your question?
|
| Actually, I don't do manual entries. At the end of each month, I
| download the transaction records from my bank. Each month includes a
| record of a payment to a credit card. (Call this the bank's record.)
| Then, I download a set of transactions from my credit card company. 2 or
| 3 days after my bank shows the payment, my credit card company shows a
| corresponding receipt of funds, which I will call the card's record.
| (Why they don't show up on the same day is a matter for banking politics.)
|
| So now I have two records of the same transaction, from both sides of
| the fence.

Ah-ha!  Now I see what you are referring to.  Glenn's response is
right.  See what he wrote too.

| I was thinking that card's record should be treated simply as
| a reconciling entry to match against the bank's record. Or am I missing
| something?

Are both of these transactions appearing in the credit card account in
gnucash?  I have two explanations but which one fits depends on
whether you are seeing both in the credit card account (and possible
both in the bank account too) or if you have one transaction in each
account.

-D

--
"He is no fool who gives up what he cannot keep to gain what he cannot lose."
    --Jim Elliot
 
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Re: Newbies, account setup and manual reconciliation

Jeffrey B. Ferland-2
In reply to this post by Jeff Smith-5
Reconciling more or less means that you just check the box next to it  
saying that "yes, I can manually see that this transaction did happen  
on the other side"

-Jeff
SIG: HUP

On Nov 15, 2005, at 3:22 PM, Jeff Smith wrote:

> Jeff Smith wrote:
> >> In the future, should I be flagging these redundant transactions as
> >> "reconciliation" records, or just ignore them completely? Does it
> >> matter which way I go?
>
> Andrew Sackville-West wrote:
>> I'm not sure what you mean by this. I assume you are manually  
>> entering a transaction when you pay your bill. Then later, when  
>> you download transactions, you get a duplicate of that  
>> transaction. Either one of these could be deleted. Reconciliation  
>> is unrelated. when you reconcile, you will mark whichever of these  
>> transactions is left. That is, when you  check off the transaction  
>> on your statement, you will check off the matching one in the  
>> account in gnucash. that's all there is to it. what am I missing  
>> in your question?
>
> Actually, I don't do manual entries. At the end of each month, I  
> download the transaction records from my bank. Each month includes  
> a record of a payment to a credit card. (Call this the bank's  
> record.) Then, I download a set of transactions from my credit card  
> company. 2 or 3 days after my bank shows the payment, my credit  
> card company shows a corresponding receipt of funds, which I will  
> call the card's record. (Why they don't show up on the same day is  
> a matter for banking politics.)
>
> So now I have two records of the same transaction, from both sides  
> of the fence. I was thinking that card's record should be treated  
> simply as a reconciling entry to match against the bank's record.  
> Or am I missing something?
>
> --
> Jeff Smith
> Computer Science Dept.
> University of Saskatchewan
> http://jefficus.usask.ca
> _______________________________________________
> gnucash-user mailing list
> [hidden email]
> https://lists.gnucash.org/mailman/listinfo/gnucash-user

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Re: Newbies, account setup and manual reconciliation

Derek Atkins
In reply to this post by Jeff Smith-5
Jeff Smith <[hidden email]> writes:

[snip]
> So now I have two records of the same transaction, from both sides of
> the fence. I was thinking that card's record should be treated simply as
> a reconciling entry to match against the bank's record. Or am I missing
> something?

You should mark the second transaction as a "duplicate" during the
import process.

-derek
--
       Derek Atkins, SB '93 MIT EE, SM '95 MIT Media Laboratory
       Member, MIT Student Information Processing Board  (SIPB)
       URL: http://web.mit.edu/warlord/    PP-ASEL-IA     N1NWH
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Re: Newbies, account setup and manual reconciliation

Beth Leonard
In reply to this post by Derrick Hudson
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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