What is the purpose of a bank reconciliation?

A bank reconciliation is used to compare your records to those of your bank, to see if there are any differences between these two sets of records for your cash transactions. The ending balance of your version of the cash records is known as the book balance, while the bank’s version is called the bank balance. It is extremely common for there to be differences between the two balances, which you should track down and adjust in your own records. If you were to ignore these differences, there would eventually be substantial variances between the amount of cash that you think you have and the amount the bank says you actually have. The result could be an overdrawn account, bounced checks, and overdraft fees. In some cases, the bank may even elect to shut down your bank account.

It is also useful to complete a bank reconciliation to see if any customer checks have bounced, or if any checks you issued were altered or even stolen and cashed without your knowledge. Thus, fraud detection is a key reason for completing a bank reconciliation.

When it comes time for the annual audit, the auditors will always examine the company’s ending bank reconciliation as part of their testing procedures, so this is yet another reason to complete a reconciliation.