Bank Reconciliation

A company's general ledger
account Cash contains a record
of the transactions (checks
written, receipts from customers,
etc.) that involve its checking
account. The bank also creates a
record of the company's
checking account when it
processes the company's checks,
deposits, service charges, and
other items. Soon after each
month ends the bank usually
mails a bank statement to the
company. The bank statement
lists the activity in the bank
account during the recent month
as well as the balance in the
bank account.
When the company receives its
bank statement, the company
should verify that the amounts
on the bank statement are
consistent or compatible with the
amounts in the company's Cash
account in its general ledger and
vice versa. This process of
confirming the amounts is
referred to as reconciling the
bank statement, bank statement
reconciliation, bank
reconciliation, or doing a "bank
rec." The benefit of reconciling
the bank statement is knowing
that the amount of Cash
reported by the company
(company's books) is consistent
with the amount of cash shown
in the bank's records.
Because most companies write
hundreds of checks each month
and make many deposits,
reconciling the amounts on the
company's books with the
amounts on the bank statement
can be time consuming. The
process is complicated because
some items appear in the
company's Cash account in one
month, but appear on the bank
statement in a different month.
For example, checks written near
the end of August are deducted
immediately on the company's
books, but those checks will
likely clear the bank account in
early September. Sometimes the
bank decreases the company's
bank account without informing
the company of the amount. For
example, a bank service charge
might be deducted on the bank
statement on August 31, but the
company will not learn of the
amount until the company
receives the bank statement in
early September. From these two
examples, you can understand
why there will likely be a
difference in the balance on the
bank statement vs. the balance
in the Cash account on the
company's books. It is also
possible (perhaps likely) that
neither balance is the true
balance. Both balances may
need adjustment in order to
report the true amount of cash.
After you adjust the balance
per bank to be the true balance
and after you adjust the balance
per books to also be the same
true balance, you have
reconciled the bank statement.
Most accountants would simply
say that you have done the bank
reconciliation or the bank rec.