The purpose of a bank reconciliation

A bank reconciliation is used to compare your records to those of your bank, to see if there are any differences between these two sets of records for your cash transactions. The ending balance of your version of the cash records is known as the book balance, while the bank's version is called the bank balance. It is extremely common for there to be differences between the two balances, which you should track down and adjust in your own records. If you were to ignore these differences, there would eventually be substantial variances between the amount of cash that you think you have and the amount the bank says you actually have in an account. The result could be an overdrawn bank account, bounced checks, and overdraft fees. In some cases, the bank may even elect to shut down your bank account.

It is also useful to complete a bank reconciliation to see if any customer checks have bounced, or if any checks you issued were altered or even stolen and cashed without your knowledge. Thus, fraud detection is a key reason for completing a bank reconciliation. When there is an ongoing search for fraudulent transactions, it may be necessary to reconcile a bank account on a daily basis, in order to obtain early warning of a problem.

When it comes time for the annual audit, the auditors will always examine the company's ending bank reconciliation as part of their testing procedures, so this is yet another reason to complete a reconciliation.

Here are some of the areas in which your records could vary from the bank records:

  • Fees. The bank has charged fees for its services, such as a monthly account fee.
  • NSF checks. The bank may have rejected some of your deposited checks, because the person or business issuing the checks did not have sufficient funds in their account(s) to remit to your bank. These are known as NSF (not sufficient funds) checks.
  • Recording errors. Either you or the bank may have recorded a check or a deposit incorrectly.

Some organizations consider the bank reconciliation to be so important that they conduct one every day, which they accomplish by accessing the latest updates to the bank's records on the bank's secure website. This is of particular importance if a company is operating with minimal cash reserves, and needs to ensure that its recorded cash balance is correct. A daily reconciliation may also be necessary if you suspect that someone is fraudulently withdrawing cash from the bank account.