A bank reconciliation is the process by which a bank account balance in an entity's books of account is reconciled to the balance reported by the financial institution in the most recent bank statement. Any difference needs to be examined and, if needed, rectified. Bank statements are routinely produced by financial institutions monthly, and are used by account holders to perform bank reconciliations.

Differences between an entity's books of account and the bank's records may arise, because: (1)Checks issued by the entity have not been presented to the bank or the bank has dishonored a check, (2) A bank transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the entity's books, or (3) Either the bank or the entity itself has made an error. Sometimes it may be easy to reconcile the difference by examining the transactions in the bank statement since the last reconciliation and the entity's own accounting records (cash-book) to see if some combination of them tally with the difference to be explained. Otherwise it may be necessary to go through and match every transaction in both sets of records since the last reconciliation, and identify which transactions remain unmatched. The necessary adjustments should then be made in the cash book, or reported to the bank if necessary. For this reason, and to minimize the amount of work involved, it is good practice to perform reconciliations at least monthly. Most bank statements provide a form and instructions to make the process relatively easy.

Bookkeeping Basics

Financial Statements for Profit Corporations and Investors