What is a bank reconciliation?

What is a bank reconciliation?

A bank reconciliation is an accounting process that verifies the accuracy of a business’s financial records. Learn its different types here. It involves comparing the balance on the business’s books with the balance shown on the most updated bank statement. The goal of a reconciliation is to identify and resolve any discrepancies between the two records.

The importance of bank reconciliations

A bank reconciliation helps uncover errors such as missing transactions, incorrect entries, or bank fees that have not been recorded in the company’s books. By reconciling the company’s records with the bank statement, the accountant can ensure that the financial information is accurate and complete.

In addition, a bank reconciliation also helps to detect fraudulent activities such as unauthorised withdrawals or check forgeries. By regularly performing bank reconciliations, businesses can maintain the integrity of their financial reporting and have a clear understanding of their current financial position.

Overall, a bank reconciliation is an essential tool for businesses to ensure the accuracy of their financial records, detect errors and fraud, and maintain financial control.

Types of bank reconciliations and examples

There are three main types of bank reconciliations used to ensure a business’s financial records align with their bank statements:

Internal reconciliation

Internal reconciliations focus on discrepancies within a company’s books before checking them against the bank. It would compare documents like sales receipts or payment logs with the internal cash transaction summaries. This is useful for spotting errors, such as inaccurate data entry.

External reconciliation

The most common type of bank reconciliation, an external reconciliation compares the company’s accounting records to the official bank statement. During this process, an accountant or bookkeeper would look for differences between outstanding checks, deposits in transit, and bank service charges.

Aggregate reconciliation

Most common for larger companies, an aggregate reconciliation looks at the balance of several bank accounts tot he business’s financial summaries. This saves time but requires detailed records to pinpoint the specific source of any discrepancies.