Reconciling your bank account transactions with your monthly bank statement is known as a bank reconciliation. The process requires comparing your bank statement with your record of withdrawals, check payments, deposits and financial transfers. Reconciliations help ensure that your balance total is correct, determine what outstanding payments have not cleared and establish any discrepancies. Bank reconciliations can be processed for small businesses and personal checking accounts and savings accounts, or for corporate accounting requirements.
Determining Account Balance
Reconciling your bank account to your checks, withdrawals and deposit records helps establish your true account balance. Your balance statement may not reflect payments that you have made but that have not been deducted from your posted balance. Knowing your true balance is essential for avoiding overdrawing your account and ensuring you have sufficient funds to cover needed withdrawals for bill payments or spending money.
Routine review of your bank account statement allows you to uncover problems. Bank automation and human error can cause transposed numbers, incorrect deposit allocations and other errors that can affect your checking account total. A monthly bank reconciliation ensures that problems are discovered quickly, and routine reviews decrease the time it take to analyze your account. Monthly bank reconciliations can also keep you from missing any deadlines for reporting discrepancies to your bank.
Identifying Uncashed Checks
Uncashed checks can cause financial problems. Checks can go uncashed if they get lost in the mail, get separated from a bill payment stub or are forgotten. Identifying your outstanding checks can help you ensure that payments to your creditors are current. Uncashed checks can lead to an overdrawn account if you forget about the outstanding obligation and rely solely on your checking account statement balance.
Bank reconciliations are a routine process in the finance and accounting departments of most businesses. Small businesses perform reconciliations to ensure the accuracy of their books. Large companies may be required to perform monthly bank reconciliations as part of their internal audit processes and to conform with federal law regarding cash management.
Monthly bank reconciliations can serve as an unofficial financial review. Reconciling your spending and deposits allows you to see the flow of money and determine whether you're spending more than you're depositing to the account. The review offers an overview of where money is spent, which can head off long-term financial problems caused by overspending.