Definition Bank Reconciliation
The bank reconciliation (if prepared or reviewed by someone other than the person with access to the checking account) is a form of internal control over a company’s checking account balance. Basically, the bank reconciliation compares the amounts in a company’s accounting records with the amounts in its bank’s records. Any differences are reconciled (explained) so that improper amounts will be exposed and the company’s records and financial statements will report the correct balance for company’s checking account.
At a minimum, the bank reconciliation should be done within a few days after the end of each month. However, with the bank’s electronic records readily accessible, the bank reconciliation should be done more frequently.
Examples for a Timely Bank Reconciliation
Some reasons for preparing a bank reconciliation as soon as possible include the following:
- If there is an error or omission in the company’s records that affected the balance in the checking account, the company might issue checks when the bank’s records properly indicate there is not sufficient funds in the checking account
- If there is an error in the company’s cash records, there will be a related error in another account because of the double-entry system of accounting.
- If a dishonest person is embezzling money through the checking account, the sooner it is discovered the smaller will be the loss. This is the reason for having an independent person prepare the bank reconciliation.
Since electronic deposits and electronic withdrawals (charges) are so common, it is important that the bank reconciliation be prepared and reviewed more frequently than once a month.
