Bank reconciliation is the process of verifying the completeness of a transaction through matching a company’s balance sheet to their bank statement. You may have heard it called closing the books. When businesses say they’ve “closed their books,” what they’re really saying is, “Our record of incoming and outgoing payments over a certain period of time matches our bank’s record of those same transactions over the same period of time.”
How does bank reconciliation work?
Comparing and verifying transactions on a company’s records to their bank account records is something finance teams across industries do. A common issue is that companies have to deal with delays and wait times associated with payment methods like ACH, wires, and checks. These delays make it hard for businesses to get an accurate picture of their entire cash flow.
A company could record a payment in its ledger, but the payment might not leave their bank account for several days. That delay makes it difficult to match changes in their account balance with a business’s own record of the payment and its context, such as date and purpose. This lag can cause temporary differences between a business’s reported net income and what’s actually in their bank account. This is why most companies opt to perform their bank reconciliation at the end of each month.
For example, let’s say there is an employee named Shrub who works at The Tree Company, which has one bank account. On April 5, Shrub hires a cleaner for the office. When the cleaner is finished, Shrub writes them a check for $300 and creates a record of the payment in The Tree Company ledger: the amount, its purpose (“cleaning fee”), and the date.
The cleaner deposits the check later that day. However, the check doesn’t clear until April 9, and $300 is withdrawn from The Tree Company’s bank account and deposited into the cleaner’s account. The transaction has settled.
At the end of the month, The Tree Company’s accountants download the company bank statement and go through each transaction to match with its accompanying purpose in the ledger. When they come to a $300 withdrawal on April 9, they look back at the virtual ledger and see Shrub’s record of an outgoing payment of $300 for “Cleaning fee” on April 5 and match the two records. If they have trouble matching the two due to the four-day check delay or for any other reason, the accountants go to Shrub and ask them to account for this $300.
The manual process can be time consuming and error prone. Automatic reconciliation capabilities could help businesses verify transactions as they settle in real-time, which provides an even more accurate picture of the business’ available income, and removes the need to maintain a balance “cushion” for unexpected costs.
What is the purpose of bank reconciliation?
Not only does bank reconciliation help businesses accurately report taxable income, it also boosts efficiency and productivity.
When businesses perform bank reconciliation, they take the time to ensure that every purchase charged to a company’s bank account helps move the business forward. Because the process involves tracing every transaction in their bank account to its original purpose, businesses have the opportunity to see which expenses had the greatest payoffs and which were inefficient uses of their money.
Who performs bank reconciliation?
Every business performs bank reconciliation, but the process varies based on the size of a company, number of bank accounts, and complexity of bank statements.
A large company could have ten bank accounts for categories like operating expenses and revenue. These accounts could be at ten separate banks, or even process transfers between other company accounts. If done manually, this added complexity can be time consuming and mean the bank reconciliation process takes weeks to complete.
These are the broader payment concepts that underpin payment operations.
- 1Payment Operations
- 2Banking API
- 3Flow of Funds
- 4Bank Reconciliation
- 5Continuous Accounting
- 6What is Money Transmission?
- 7What is Cash Management?
- 8What is Treasury Management?
- 9What are Incoming Payment Details?
- 10Payment Processor vs. Payments Gateway
- 11What is Cash Forecasting?
- 12What is Cash Pooling?
- 13What is Liquidity Management?
- 14What is an Agent of the Payee Exemption?
- 15What is Real-Time Gross Settlement (RTGS)?
- 16What is Batch Processing?
- 17What are Payment Controls?
- 18What is Idempotency?
- 19Settlement (Net vs. Gross)
- 20What is Asset Risk Management?
- 21What is A2A Banking?
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