Purpose and Process of Bank Reconciliation

Why Bank Reconciliation is Important and How to Do It

The purpose and process of bank reconciliation is to make sure that the money records in your business match the bank’s records. It helps you find any mistakes or missing entries, so you always know the true amount of money you have.

Bank reconciliation is done by comparing your cash book (your own record of money received and paid) to the bank statement (the bank’s record of your transactions). Differences can happen because transactions may take time to show on the bank statement.

Here is the simple process to do a bank reconciliation correctly:

1. Get your bank statement and cash book: Collect the latest bank statement and your cash book records for the same period.
2. Tick off matching entries: Go through each transaction in your cash book and find the same transaction on the bank statement. Place a tick to show they match.
3. Identify missing items: Look for entries in your cash book not on the bank statement. These might be deposits that are still being processed or cheques not yet cleared.
4. Find errors: Check both records carefully for mistakes, such as wrong amounts or missing entries. Correct these in your cash book if needed.
5. Record bank charges and interest: Sometimes banks charge fees or pay interest, which only appear on the statement. Add these to your cash book.
6. Calculate the adjusted balance: Adjust your cash book balance by adding or subtracting any missing transactions or errors you found. The total should now match the closing balance on the bank statement.

Doing this regularly, such as monthly, helps you spot fraud, avoid overdrafts, and keep your money records accurate. It improves your financial control and makes sure your bookkeeping is reliable.

In short, the purpose and process of bank reconciliation helps your business stay financially healthy by confirming your records and the bank’s records agree.