Have you ever tried doing bank reconciliation, also known as bank recon or bank rec? Did you find it tedious or quite confusing? What is the meaning of bank reconciliation and what is its purpose?

Details of cash receipts and cash disbursements are summarized in the general ledger which is the company’s book records. At the end of the month we normally receive bank statements showing the details of deposits, withdrawals, and checks that cleared in the bank records. Usually, there are discrepancies between the books and the bank statements. An example of such discrepancies is checks written in one month but cleared in the bank in the following month. Another is bank service fees which we find out only when we see the bank statement.

The purpose of doing the bank reconciliation is to verify that all transactions in the company’s books tally with those of the bank statements. This avoids duplication and omission of transactions in your books. Bank reconciliation is also good for identification of errors or fraud because cash is the most vulnerable asset of the company and is oftentimes prone to theft. Therefore bank reconciliation is a control mechanism to avoid cash irregularity such as unauthorized withdrawals. Policy of separation of duties must be implemented – that is, the person who does the bank reconciliation cannot be the same person who handles cash.

If you are a small business owner and you are the only one doing all of the handling of cash, recording of transactions, and bank reconciliation, then you might consider this task tedious and time consuming, especially, when you have many of cash transactions.