Bank Reconciliation - What is it?

The Number 1 Financial Internal Control - Cash is King!

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Let's not beat around the bush.

The Bank Reconciliation ('Rec') is the Number 1 financial internal control.

Why is it so important? 2 main reasons:

  • because, ultimately, Cash is King .  Whatever the accounting, the actual cash balance in the bank is the truth and real cash is the lifeblood of any business. The bank rec provides the evidence as to how accurate and reliable the actual accounting for that cash is.
  • because accounting records are being validated against those of an independent, regulated 3rd party (ie. the Bank)

 So if you are up against it and only have time to do one thing - do the bank reconciliation!

All About Bank Reconciliations

1. Bank Reconciliation - Definition - What is it?

The Bank Reconciliation ('Bank Rec') is an accounting schedule that supports and validates the Bank account balance in the General ledger using data from two sources: - the entity' s own accounting records and those of the Bank (ie. the bank statement).

It is the primary financial internal control evidencing the completeness, accuracy and integrity of accounting records.

To be valid it should be supported by lists of items, transactions and explanations (audit trail) and be signed off by both the preparer and a line manager or supervisor (for integrity and segregation of duties).

Bank Reconciliation schedules are key pieces of evidence required by auditors when assessing audit risk and scope and to support their audit opinion.

2. Bank Reconciliations - Why So Important?

Cash is King - the ultimate test of a transaction is will it convert to cash either coming in to the business or leaving it. The Bank Rec lists all transactions recorded as 'Cash and Bank ' in the Ledgers but yet to have passed through the bank statements as 'real'.

Window on Exposure to Risk - the bank rec therefore quantifies risk in possible mis-statement of reported figures and results, eg. a large receipt may be have been double posted in the ledgers, overstating cash and understating debtors.

The categories of items on the bank rec can therefore shed light on any process and system failures that need addressing across finance and the wider business.

Validation Against 3rd Party Acounting Records - it is the ability to compare in-house accounting records with those of an independent, controlled and regulated 3rd party - the Bank - that gives the bank rec its real weight and muscle as an internal control.

It is therefore vital to stay on top of the bank reconciliations!

3. Bank Rec - Process and Method

The actual data used to construct a bank reconciliation will be the culmination of reconciling activity that has taken place over the last month.

Typically Bank Statements will be downloaded daily from the banking system and uploaded to a Cash Management module linked to the ledgers. An auto-reconciliation procedure will run and 'match off' (ie. reconcile) transactions that appear in both sets of records.

In parallel, a manual process will be followed to review and clear the remaining transactions - and any brought forward from prior months. This will involve investigating and resolving issues, posting any corrections or omissions, and then matching off and flagging these items as reconciled.

As items are matched and reconciled they 'disappear' as far as the bank reconciliation is concerned.

So the more reconciling work that is done through the month the more accurate the accounting records, the lower the risk of misstatement and the easier the bank reconciliation!

Message?  Stay on top of the bank reconciliations and the daily process! Once control is lost it can take a lot of pain and strain to recover it.

4. Bank Reconciliation - Accounting

Although the bank rec itself is just an accounting schedule and not part of double entry accounting, the process of matching transactions can create accounting entries - if the finance system is configured that way.

Bank account entries generated in the sub-ledgers - such as Sales Ledger (receivables) and Purchase Ledger (payables) - will initially post to a Bank Control account (a holding account) in the General Ledger.

Only when a transaction is 'officially' validated by matching it to a bank statement line will it be re-analysed to the 'true' GL Bank account.


1. Customer Receipt generated in Sales Ledger  £1,000:

Debit (Dr). Bank Control     1,000  (contras with below)

               Credit (cr.)    Sales Ledger     1,000

2. Receipt Matched to Bank Statement line:

Dr.    Bank   1,000

    Cr.     Bank Control   1,000  (contras with above)

In this sense, the balance on the Bank Control account represents the un-validated transactions and thus the risk of possible overstatement of cash.


5. Simple Bank Reconciliation Example Template

The goal is to show that you can get from the Bank Statement to the GL Balance (assuming just one GL account).

Depending on systems, the data for the bank rec will (hopefully!) be presented automatically as a standard report set.

Note: the variance here is zero - accounting heaven!

But it may not always be.

Some bank accounts may never reconcile 100% (eg. high-volume low-ticket accounts) and a judgement call needs to be made as to materiality / risk of any variance - welcome to the real world of accounting!

6. Types of Reconciling Items

Getting the reconciliation to work is one thing, but that's just the first step. It's the nature of the reconciling items that provide the really useful insight into adequacy of controls, operating efficiencies. process failures and exposure to risk.

The types of items that could be in the 'Reconciling Items' lines in 5. above may include:

  • normal timing differences (ie. month end 'cut-off' items) eg. credit card collections or refunds posted in the ledgers on the last day of the month but do not appear on bank statement until 1st day of next month; cheques sent out but yet to be presented (cleared) to the bank; late unidentified receipts on the bank statement, awaiting a home. These items are expected to disappear in the normal course of processing and can be simply validated by checking entries in the new month's first bank statements.
  • historic and legacy items - these are unresolved items from current or prior periods requiring adhoc action to clear - and represent risk eg.
  • posting and coding errors and omissions - eg transactions posted to the wrong account in the GL
  • system issues - eg. transactions incompletely processed and waiting for the IT team to fix
  • backlog issues - these could be legitimate transactions on one system but which the processing teams have yet to process onto the other system

Each category of items will give insight into different aspects of risk, inefficiencies and control weaknesses. The trick is to get to the bottom of these during the next month and get them resolved else it's deja vu next month end!

7. When are bank reconciliations performed?

Bank recs should be perfomed monthly, immediately after month end close.

Occasionally less important or less material accounts may be reconciled on a cyclical basis (eg, every quarter).

ALL balances should be reconciled at Financial Year End.

However, to manage risk and avoid unpleasant, unwanted surprises at month end (!), the process of reviewing and reconciling unmatched items should be closely managed throughout the month.

8. How long do bank reconciliations take to complete?

How long's a piece of string?

Overall they will consume a large amount of team time in any Finance Department.

How much time an individual reconciliation takes can be a function of:

  • robustness of financial systems;
  • availability of reports supporting lines in the rec
  • accuracy of transaction processing during month;
  • the scale of any transaction-processing backlogs
  • ease of determining accurate cut-off at period close
  • and so it goes on....!!

Get the idea?!

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