The process of matching the balances in a business's accounting records against the corresponding bank statement to explain any differences.
Bank reconciliation is the monthly process of comparing your accounting software's cash account balance against your bank statement to identify and explain any discrepancies. Differences between the two arise from timing (checks issued but not yet cleared, deposits in transit) and errors (bank charges not yet recorded in the books, bank errors). The goal is to arrive at a reconciled balance that both records agree on.
A standard bank reconciliation starts with the bank statement balance, adds deposits in transit, subtracts outstanding checks, adjusts for bank errors, and arrives at the "adjusted bank balance." It then starts with the GL cash balance, adds any bank credits not yet recorded in the books (like interest earned), subtracts bank charges, adjusts for book errors, and arrives at the "adjusted book balance." The two adjusted balances must be equal.
In practice: Baybayin Coffee Shop's March bank statement shows an ending balance of ₱312,500. Its GL cash account shows ₱298,000. Reconciling differences: ₱22,000 deposit made March 31 not yet showing in bank (+₱22,000 to bank side); ₱14,500 check to supplier not yet cleared (−₱14,500 from bank); ₱2,000 bank service charge not recorded in books (−₱2,000 from book side). Adjusted bank: ₱312,500 + ₱22,000 − ₱14,500 = ₱320,000. Adjusted book: ₱298,000 − ₱2,000 = ₱296,000. Still a gap — the team investigates and finds a ₱24,000 deposit recorded twice in the books, corrects it, and the two sides reconcile at ₱296,000.
Why it matters: Bank reconciliation is the most fundamental internal control for any business. It catches fraud (unauthorized payments), errors (duplicate entries), and timing differences before they compound into large unresolvable discrepancies. Businesses that reconcile monthly spend 30 minutes on it; those that wait six months spend days.