What is a Bank Reconciliation and Why is it Important?

​The general ledger contains a record of a company’s cash transactions, and a bank statement tracks all money moving in and out of a company’s account. So, theoretically, these two statements should convey the same information and result in the same cash balances. However, in practice, this is rarely the case. Businesses of all sizes need to perform regular reviews, called bank reconciliations, to ensure that these two documents balance.

​What is a Bank Reconciliation?

A bank reconciliation is the process of matching information regarding cash accounts from accounting records to the corresponding information on bank statements. Simply put, a reconciliation is how a business makes sure it has the cash it thinks it has.

While financial statements like the general ledger indicate how much money a business should have, a bank statement indicates how much money a business does have because it is a true picture of all the completed transactions over a specific time that affected the company’s account.

With payments and deposits constantly in-transit, and additional items like interest and bank fees to account for, it is very unlikely that the two will balance on their own. The goal is to find the difference between the two and book accounting entries, where needed, to make them match.

Bank Reconciliation Statement

The term “bank reconciliation” actually refers to the process of verifying and adjusting cash movement, whereas a bank reconciliation statement is the formal document that a business prepares to maintain for its own records.

Bank reconciliation statements may be required by partners or financiers as part of the funding process, and they are helpful in the case of an audit as well. It is advised that after performing a bank reconciliation, that the document is kept on file like any other financial statement that a business generates and held onto as part of its records.

Typically, bookkeepers or accountants will prepare the bank reconciliation statement either by hand or with the help of integrated accounting software. However, some businesses employ third-party providers to reconcile their bank records for improved accuracy and turnaround time. This is especially common with larger companies that have more transactions to account for each month.

Why is a Bank Reconciliation Important?

Bank reconciliations need to be done regularly to identify discrepancies before they become problems. In the absence of regular bank reconciliations businesses can end up with bounced checks and failed electronic payments in the short-term and even become financially overstretched in the long-term. All these outcomes affect cash flow, which can hurt the sustainability and future growth of the business.

Periodic bank reconciliations also help to catch fraud and cash manipulations quickly to minimize damage to the company. Business accounts do not have the same federal protections that consumer accounts do, so the bank does not have cover fraud or errors in the account. Therefore, performing a bank reconciliation is an important step in safeguarding the company from losing money unnecessarily.

Benefits of Performing a Bank Reconciliation

After performing a bank reconciliation, a business will have:

• Greater confidence in the amount of cash that it has on hand
• A reduction in bounced checks to suppliers and partners, which improves brand trust and can earn more flexible payment terms
• Insight into which customer or supplier payments have failed to enable better decision-making around attempting to collect payment
• Cleaner books and greater business confidence to attract investors

Follow our bank reconciliation series for more insight into this important topic. We will be featuring advice on how often to perform a bank reconciliation, what is needed to do so, fixing common problems that can arise, and a step-by-step tutorial on doing a bank reconciliation for the first time.

​Do you need help with your bank reconciliations?  Contact us today!