What is bank reconciliation?

There can be times when your financial records might not be the same as your bank’s. Bank reconciliation involves comparing these records and identifying any differences between the two. This is important for keeping track of your business’ money.

There are a few reasons the balance on your records may not be the same as the bank’s:

  • When someone hasn’t yet cashed a cheque you’ve sent: The money owed from that cheque is still in your bank account – but it’s no longer yours to spend.

  • Changes to bank accounts at the end of a month: This can happen when you withdraw or deposit money just before the bank sends a statement. Those changes to the account might not show until the following month’s statement.

  • Deposits in transit: Deposits you’ve made and recorded in your books that haven’t yet processed through the bank.

  • The bank deducts loan payments: The bank can deduct money for loans before you enter that information into your systems.
  •  

For example, if you’ve sent someone a cheque but they haven’t cashed it yet. That money is still in your bank account – but it’s no longer yours to spend.

If you withdraw or deposit money just before the bank sends a statement, those changes to your balance might not show up. This normally happens at the end of the month. If you make a deposit to the bank on October 31, for example, it might not show on the bank’s records until the November bank statement.

Another example is when the bank deducts money for loans before you’ve entered that information into your system. 

Bank reconciliation helps you identify these cases so you know exactly how much money is available to your business. It’s also needed to identify any cases of human error, bank charges and possible fraud.

 

Related terms:
What is financial management?
What is a bank statement?

Related Xero feature:
Keep track of your cash flow with fast bank reconciliation

Related Small Business Guide:
Make small business accounting fun

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What is bank reconciliation?

There can be times when your financial records might not be the same as your bank’s. Bank reconciliation involves comparing these records and identifying any differences between the two. This is important for keeping track of your business’ money.

There are a few reasons the balance on your records may not be the same as the bank’s:

  • When someone hasn’t yet cashed a cheque you’ve sent: The money owed from that cheque is still in your bank account – but it’s no longer yours to spend.

  • Changes to bank accounts at the end of a month: This can happen when you withdraw or deposit money just before the bank sends a statement. Those changes to the account might not show until the following month’s statement.

  • Deposits in transit: Deposits you’ve made and recorded in your books that haven’t yet processed through the bank.

  • The bank deducts loan payments: The bank can deduct money for loans before you enter that information into your systems.
  •  

For example, if you’ve sent someone a cheque but they haven’t cashed it yet. That money is still in your bank account – but it’s no longer yours to spend.

If you withdraw or deposit money just before the bank sends a statement, those changes to your balance might not show up. This normally happens at the end of the month. If you make a deposit to the bank on October 31, for example, it might not show on the bank’s records until the November bank statement.

Another example is when the bank deducts money for loans before you’ve entered that information into your system. 

Bank reconciliation helps you identify these cases so you know exactly how much money is available to your business. It’s also needed to identify any cases of human error, bank charges and possible fraud.

 

Related terms:
What is financial management?
What is a bank statement?

Related Xero feature:
Keep track of your cash flow with fast bank reconciliation

Related Small Business Guide:
Make small business accounting fun

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