Plain definition
A bank reconciliation compares the cash balance in the accounting records with the balance reported by the bank for the same date. The two figures often differ for understandable timing items: a payment may be recorded in the books before the bank clears it, or cash may be deposited before the bank statement reflects it. Bank charges, interest, duplicate postings, and errors also create differences.
The purpose is not to force the numbers to agree. It is to identify every difference, determine whether the accounting record needs correction, and show which timing items still need follow-up.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
Suppose the bank statement at 30 June shows . The company recorded an supplier cheque on 30 June, but the supplier has not yet presented the cheque to the bank, so the ledger shows .
The reconciliation identifies a timing difference rather than an unexplained loss. If the cheque remains outstanding for several weeks, the team should investigate whether it was lost, cancelled, duplicated, or posted to the wrong supplier.
| Bank statement balance | |
|---|---|
| Supplier cheque recorded but not yet presented | |
| Ledger cash balance |
A reconciliation supports the cash balance; it does not prove that every payment was authorised or that the company has enough cash for upcoming obligations.
Why it matters
Cash requires careful checking because it is used in daily decisions and can be affected by recording errors or misuse. An unreconciled difference can hide a missing receipt, an unrecorded bank charge, or a cheque posted twice. Management may otherwise rely on cash that is not really available.
Practical consequence
Reconcile each material bank account to the statement date, list each difference by amount, date, explanation, and owner, and obtain review by someone independent of preparing the reconciliation. Correct book errors promptly. Age timing items and investigate anything that does not clear in the expected cycle; a carried-forward unexplained difference is not a completed reconciliation.