While this article is written more from a business perspective, it applies to personal accounts as well. If you have ever “balanced your checkbook”, you have completed a bank reconciliation. The two terms are synonymous. But why should you do a bank reconciliation? And why is it important? How a Bank Reconciliation Works When you reconcile your bank account, you compare your internal financial records (i.e. your accounting records, checkbook, etc.) against the records provided to you by your bank (i.e. the bank statement). Verify each transaction individually, making sure the amounts match perfectly, and note any differences. Most of the differences you will encounter involve timing:
Maybe you wrote a check (which decreases your internal accounts) and that check hasn’t cleared the bank as of the day that you are doing the reconciliation. These transactions are referred to Outstanding Checks
Maybe you received a check (which increases your internal accounts) and that check hasn’t been deposited as of the day that you are doing the reconciliation. These transactions are referred to as Deposits in Transit
Why is a Bank Reconciliation Important?
A reconciliation can help you identify any fraud, unusual transactions, errors, as well as help you spot inefficiencies.
Signs of fraud should be your priority when reconciling transactions in your bank account. A few things to consider include:
Were legitimate checks that you issued duplicated or changed, resulting in more money leaving your checking account?
Were checks issued without authorization?
Are there unauthorized transfers out of the account, or did anybody make unauthorized cash withdrawals?
Does the account have any missing deposits?
A properly implemented bank reconciliation process will help you:
Know how much cash you really have available in your accounts (i.e. it is what your internal records say, not what the bank statement says, that is most important)
Avoid bounced checks or payments, thereby avoiding bank fees for insufficient funds or using lines of credit, which could have you incur interest costs
Know if customer payments have bounced or failed, and determining if any action is needed
Keep track of your outstanding checks and following up with payees (i.e. did they never receive your payment?)
Make sure every transaction gets entered into your accounting system properly
Catch any bank errors in a timely manner
We hope that you found this article helpful. And again, we are available if you have questions, concerns or need assistance.