Lesson 16 of 20 · 7 min

How to check a balance chain

Opening balance plus draws minus repayments plus interest should equal the closing balance, exactly.

A balance chain is the simplest check in this track and the one most likely to find something, because it does not require the agreement — only two consecutive statements and addition.

closing = opening + draws − repayments + interest ± fees ± adjustments

opening: The closing balance of the previous statement. It must match exactly; a gap here is the first thing to resolve.
draws: Every amount advanced during the period, including any drawn to pay interest or fees.
repayments: Every amount applied to the balance, including auto-pay debits.
interest: The charge for the period, ideally the figure you recomputed in the previous lesson.
fees and adjustments: Everything else. Each one should be identifiable; the residual is what you are testing for.

Run it in order and stop at the first thing that does not reconcile. Does this statement's opening balance equal last statement's closing balance? Does every draw and repayment correspond to something you recognise? Does the arithmetic close to the cent?

What the check finds, in rough order of frequency: an unrecognised auto-pay or fee, a prior-period adjustment that was not labelled as one, an interest figure that does not match your recomputation, and occasionally a draw you did not initiate — for instance interest capitalised as a draw rather than charged, which is a different accounting treatment with the same effect on the balance.

The value of a residual is that it is a number. Approaching a lender with a question about a figure that does not reconcile by $250.00 is a completely different conversation from approaching them with a feeling that the balance looks high.

Key terms

Balance chain: The sequence linking one statement's closing balance to the next one's opening balance through the period's activity.
Residual: The unexplained difference after accounting for every known item. The output of the check.
Capitalisation as a draw: Unpaid interest appearing as an advance rather than as a charge. Different presentation, same effect on the balance.

Worked example

A chain with a $250 residual

Two consecutive statements. Previous closing balance $300,000. Verified interest for the period $1,846.64.

Opening balance on this statement: $300,000.00
Plus draws: $10,000.00
Less repayments: −$5,000.00
Plus verified interest: $1,846.64
Expected closing balance: $306,846.64
Statement closing balance: $307,096.64

Five lines of addition produced a specific $250.00 question. That is the entire point of the exercise.

Check yourself

Opening balance $300,000, draws $10,000, repayments $5,000, verified interest $1,846.64, and the statement's closing balance is $307,096.64. What have you found?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.