Definition
Bank reconciliation is the process of comparing a business’s internal accounting records against its bank statement to confirm they match. Any differences are investigated and resolved, ensuring the books accurately reflect the actual cash position of the business.
How Often Should You Reconcile?
The process typically happens monthly, though high-volume businesses may reconcile weekly or even daily. The starting point is the closing balance in the cash ledger (the accounting records) and the closing balance on the bank statement. In most cases, these two figures will not initially match because of timing differences, outstanding transactions, or errors.
Common Causes of Reconciliation Differences
Timing differences are the most common cause of discrepancies. An outstanding cheque that has been recorded in the books but has not yet cleared the bank will cause the book balance to appear lower than the bank balance. Deposits in transit, where cash has been recorded in the books but has not yet been processed by the bank, cause the opposite effect.
The reconciliation adjusts for these timing differences to arrive at the adjusted book balance and the adjusted bank balance. Once both adjusted figures match, the reconciliation is complete. If they still do not match, the remaining difference is either an error in the books, an error by the bank, or an unrecorded transaction such as a bank fee or direct debit.
Why Bank Reconciliation Matters
Bank reconciliation serves as a control against fraud and error. It catches duplicate payments, payments to the wrong supplier, unauthorised withdrawals, and data entry mistakes before they compound into bigger problems. A business that reconciles monthly has at most a 31-day window in which an error can go undetected.
Bank Reconciliation Software
Modern accounting software such as Xero, MYOB, and QuickBooks can connect directly to bank feeds, matching transactions automatically and flagging only the unmatched items for review. This has reduced reconciliation from a time-consuming manual task to something that can often be completed in minutes.