Bank reconciliation is the process of comparing a company's records of its bank account transactions to the bank's records of the same transactions. The purpose of bank reconciliation is to ensure that the company's records are accurate and complete, and to identify and correct any discrepancies.
Here is an example of how bank reconciliation might work in practice:
Suppose that a company called ABC Inc. maintains a checking account at XYZ Bank. At the end of the month, ABC Inc. receives a statement from XYZ Bank showing all of the transactions that have occurred in the account during the month. ABC Inc. then compares this statement to its own records of the transactions, and it looks for any differences.
For example, ABC Inc. might find that it has recorded a deposit of $500 that is not shown on the bank's statement. In this case, ABC Inc. would contact the bank to inquire about the missing deposit, and it would make the necessary adjustments to its records to ensure that they match the bank's records.
Alternatively, ABC Inc. might find that the bank's statement includes a charge for a bounced check that ABC Inc. was not aware of. In this case, ABC Inc. would need to investigate the charge and determine whether it is valid or if it should be disputed. If the charge is valid, ABC Inc. would need to make the necessary adjustments to its records to reflect the charge.
In this way, bank reconciliation is a valuable tool that helps companies ensure the accuracy and completeness of their financial records, and it can help identify and resolve any discrepancies between the company's records and the bank's records.