What Is a Bank Reconciliation

A bank reconciliation is the process of comparing a company’s financial records, typically its cash account in the general ledger, with the information provided by its bank statement to ensure that both sets of records match. 

This process helps identify discrepancies such as outstanding checks, deposits in transit, bank fees, or errors that may have occurred either in the company’s books or at the bank. When businesses reconcile regularly, they can catch fraudulent transactions, avoid overdrafts, and maintain an accurate picture of their cash position. 

For example, if your books show a higher balance than the bank, it could mean certain checks haven’t cleared yet, or bank service charges haven’t been recorded. On the other hand, if the bank shows a higher balance, it may be due to deposits that haven’t been updated in your accounting system.

How Does a Bank Reconciliation Work

A bank reconciliation systematically compares your company’s cash records with the bank’s statement for the same period, line by line, to identify and resolve any differences. The process usually begins with checking the ending balance on the bank statement against the balance in your books. 

From there, you adjust for timing differences such as outstanding checks that have been issued but not yet cleared by the bank, or deposits that you’ve recorded but that have not yet appeared on the statement. You’ll also need to account for transactions that appear on the bank statement but are missing in your records, such as bank fees, interest earned, or automatic payments. 

For example, imagine your accounting system shows a balance of $10,000 at the end of June, while your bank statement shows $9,700. Upon reconciling, you find that you wrote a $500 check to a vendor that hasn’t cleared yet (an outstanding check) and the bank charged a $200 service fee that you hadn’t recorded. Once you adjust your books for the $200 fee, your adjusted balance becomes $9,800, which matches the reconciled balance after considering the outstanding check. This ensures both sets of records reflect the true cash position and highlights any discrepancies that may need further investigation.

What Is the Purpose of Bank Reconciliation

The purpose of a bank reconciliation is to ensure accuracy and transparency in a company’s financial records and to confirm that the cash balance in the accounting books matches the balance reported by the bank. Since timing differences, errors, or unrecorded transactions can easily occur, reconciliations serve as a checkpoint to catch discrepancies early. They help detect issues such as missing deposits, double payments, bank fees, or even fraudulent activity. 

For businesses, this process is not just about balancing the books, but maintaining financial control, improving cash flow management, and making informed decisions based on reliable data. For example, without reconciling, a business might think it has more cash available than it actually does, leading to overdrafts or missed obligations.

Who Performs Bank Reconciliation

Bank reconciliation is typically performed by a company’s accounting or finance team, depending on the size and structure of the organization. In small businesses, the owner or bookkeeper often takes on this task since they directly manage daily financial activities and need a clear view of cash flow. 

In larger organizations, the responsibility usually falls to accountants or accounts payable/receivable staff, with an added layer of oversight from controllers or finance managers to ensure accuracy and prevent fraud. Some companies even use specialized accounting software that automates much of the reconciliation process, while still requiring a human to review and approve the final results. 

To maintain strong internal controls, it’s considered best practice for the person reconciling accounts to be different from the person who handles cash transactions. This separation of duties reduces the risk of errors and fraudulent activity, while ensuring the company’s financial records remain accurate and trustworthy.