What is bank reconciliation?

Imagine a scenario where you receive a box of twelve uniquely handcrafted Swiss chocolates. You indulge in two pieces over the weekend and one on Tuesday. You express your delight to your friend, and to your surprise, he gifts you another box of twelve on Wednesday. The temptation of the smooth and creamy texture with a rich cocoa taste leads you to consume two more on Thursday. Yes, it's high in calories, but who cares? Weight loss can wait. How many chocolates do you have now?

Although counting chocolate is unrelated to bank reconciliation, this scenario can help us understand balancing and adjusting [vital parts of the reconciliation process].

What is bank reconciliation?

Bank reconciliation is a meticulous accounting process that precisely balances your company's financial records with the transactions shown on your bank statement. With its unwavering precision, this process ensures that both records accurately reflect your financial position. It involves thoroughly comparing the transactions in your accounting records to those on your bank statement, identifying any differences, and making precise adjustments to ensure both records align. Regularly reconciling bank accounts not only helps to maintain accurate financial records but also serves as a robust measure to prevent fraud. 

Cleared and Uncleared

The funds undergo a meticulous 'clearing' process [bank clearance] before updating the recipient and payer banks. It's of utmost importance to understand that you may indicate in your ledger that you've paid the supplier and transferred the funds, but it takes time for the payment to clear before transferring to the recipient bank. These yet-to-be 'cleared' payments are the uncleared transactions that will not surface in the bank statement. Grasping this distinction is a key step towards mastering the bank reconciliation process.

The beginning and end [closing] balances.

The beginning balance of your bank statement is a 'carried forward' from the previous month's ending balance. Similarly, the reconciled end balance pushes the figure into the following month as a beginning balance. It's crucial to note that these balances must be the same — they must agree for a successful reconciliation.

The reconciliation equation is straightforward: add the [cleared] receipts to the beginning balance and subtract the [cleared] payments to get the end balance, with a reconciliation difference of 0.00. When applied correctly, this equation, with its simplicity, ensures a successful reconciliation, giving you confidence in the accuracy of your financial records.

Must the reconciled end balance [or statement's closing balance] be agreed with the ledger balance?

The ledger is a collection of both cleared and uncleared transactions. The reconciliation process focuses on the cleared transactions, which have been processed and reflected in the statement. The process leaves those uncleared transactions as outstanding cheques and deposits. These uncleared transactions are essential to track as they can affect your financial position and the accuracy of your records. When adding the uncleared records to the reconciled end balance or the statement's closing balance, you get the ledger balance, which is the Balance Sheet's bank account balance.