What is bank reconciliation? Why is it important?

On an ongoing basis, there is generally a difference between what the business shows in the cash account (book balance) and what the bank shows (bank balance). The bank reconciliation brings to light these discrepancies to create an understanding and reconcile the differences will prevent costly mistakes. Potential losses are mitigated by uncovering fraudulent activities earlier.

The bank reconciliation shows what checks are still ‘outstanding’ meaning they have not been presented for payment through your banking institution. It will reveal if unauthorized checks have processed through the account. Banking fees which are listed on the bank statement need to be added to the business’s accounting records. Any returned checks must be accounted for, as well as, posting errors.

Auditors utilize the bank reconciliation as part of their testing processes to provide a window into the business’s overall accounting procedures. Are these procedures in compliance with GAAP (Generally Accepted Accounting Principles).