Bank Reconciliation
Matching your accounting records to your bank statement to identify discrepancies.
Definition
Bank reconciliation compares your cash account balance in the general ledger to the bank statement balance, then explains any differences. Common differences include: outstanding checks (written but not cashed), deposits in transit (deposited but not yet cleared), bank fees, and interest earned.
The reconciliation produces an adjusted book balance and adjusted bank balance that should match. Differences indicate errors in your records, bank errors, or fraudulent transactions.
Why It Matters
Monthly bank reconciliation is a critical control that catches errors, prevents fraud, and ensures accurate cash balances. Skipping reconciliation allows errors and fraud to compound undetected.
Unexplained differences signal problems: unauthorized transactions, data entry errors, or bank mistakes. Investigate all differences—small unexplained amounts can indicate larger issues.
Examples
- 1
Book balance $10,000, outstanding checks $1,500, deposits in transit $500, bank fees $50 = Adjusted bank balance $9,000 = Adjusted book balance $9,950 - $50 = $9,000.
- 2
Reconciliation finds unauthorized $200 charge—contact bank immediately to dispute.
- 3
Regular reconciliation catches bookkeeper error: deposit entered twice, overstating cash by $5,000.
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