Bank reconciliation is the monthly process of comparing the business’s accounting records to the bank statement, line by line, to verify they agree. When they don’t, the discrepancy must be identified and resolved — it’s either a timing difference (a check written but not yet cashed), a recording error (a transaction entered in the wrong amount), or an unknown transaction (a charge the business didn’t authorize).
Why it matters
Without reconciliation, errors accumulate. A 1,500 was actually $1,050. A supplier charged twice for the same delivery. These errors distort the income statement and balance sheet, leading to decisions based on wrong numbers.
The process
- Compare the bank statement ending balance to the book (accounting software) ending balance.
- Mark off every transaction that appears in both records.
- Identify items in the bank statement not in the books (bank fees, interest, automatic payments) — record them.
- Identify items in the books not in the bank statement (outstanding checks, deposits in transit) — note them as timing differences.
- After adjustments, the balances should match. If they don’t, find the remaining discrepancy.
Most accounting software automates much of this through bank feeds — transactions import daily and are matched against recorded entries. But automated matching isn’t perfect, and the monthly reconciliation catches what the automation misses. See Accounting Software Setup and Automation and Small Business Bookkeeping.