Discover our latest AI-powered innovations around faster payments, smarter workflows, and real-time visibility.Learn more →
Bank reconciliation is the process of verifying the completeness of a transaction through matching a company’s balance sheet to their bank statement. You may have heard it called closing the books. When businesses say they’ve “closed their books,” what they’re really saying is, “Our record of incoming and outgoing payments over a certain period of time matches our bank’s record of those same transactions over the same period of time.”
How does bank reconciliation work?
Comparing and verifying transactions on a company’s records to their bank account records is something finance teams across industries do. A common issue is that companies have to deal with delays and wait times associated with payment methods like ACH, wires, and checks. These delays make it hard for businesses to get an accurate picture of their entire cash flow.
A company could record a payment in its ledger, but the payment might not leave their bank account for several days. That delay makes it difficult to match changes in their account balance with a business’s own record of the payment and its context, such as date and purpose. This lag can cause temporary differences between a business’s reported net income and what’s actually in their bank account. This is why most companies opt to perform their bank reconciliation at the end of each month.
For example, let’s say there is an employee named Shrub who works at The Tree Company, which has one bank account. On April 5, Shrub hires a cleaner for the office. When the cleaner is finished, Shrub writes them a check for $300 and creates a record of the payment in The Tree Company ledger: the amount, its purpose (“cleaning fee”), and the date.
The cleaner deposits the check later that day. However, the check doesn’t clear until April 9, and $300 is withdrawn from The Tree Company’s bank account and deposited into the cleaner’s account. The transaction has settled.
At the end of the month, The Tree Company’s accountants download the company bank statement and go through each transaction to match with its accompanying purpose in the ledger. When they come to a $300 withdrawal on April 9, they look back at the virtual ledger and see Shrub’s record of an outgoing payment of $300 for “Cleaning fee” on April 5 and match the two records. If they have trouble matching the two due to the four-day check delay or for any other reason, the accountants go to Shrub and ask them to account for this $300.
The manual process can be time consuming and error prone. Automatic reconciliation capabilities could help businesses verify transactions as they settle in real-time, which provides an even more accurate picture of the business’ available income, and removes the need to maintain a balance “cushion” for unexpected costs.
What is the purpose of bank reconciliation?
Not only does bank reconciliation help businesses accurately report taxable income, it also boosts efficiency and productivity.
When businesses perform bank reconciliation, they take the time to ensure that every purchase charged to a company’s bank account helps move the business forward. Because the process involves tracing every transaction in their bank account to its original purpose, businesses have the opportunity to see which expenses had the greatest payoffs and which were inefficient uses of their money.
Who performs bank reconciliation?
Every business performs bank reconciliation, but the process varies based on the size of a company, number of bank accounts, and complexity of bank statements.
A large company could have ten bank accounts for categories like operating expenses and revenue. These accounts could be at ten separate banks, or even process transfers between other company accounts. If done manually, this added complexity can be time consuming and mean the bank reconciliation process takes weeks to complete.
Frequently Asked Questions:
Try Modern Treasury
See how smooth payment operations can be.
Learn
Payment operations is an umbrella term that refers to the entire lifecycle of money movement for a company.
Bank reconciliation is the process of verifying the completeness of a transaction through matching a company’s balance sheet to their bank statement.
A banking API is software that facilitates a digital connection between a company and a bank.
The term "cash position" pertains to the quantity of cash or assets that can be readily converted to cash, held by an individual, company, or financial institution at any given moment.
Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.
Fiat money is a form of currency issued by a government and declared legal tender, though not backed by a commodity.
Financial reporting empowers businesses to make informed financial decisions by identifying trends and tracking performance. It also offers insights into a company's assets, liabilities, and debt management strategies.
The Flow of Funds is the movement of money in and out of bank accounts.
Gross merchandise volume (GMV), also known as gross merchandise value, is the total value of the goods or services retailers sell over a set period.
An invoicing API allows companies to create, send, manage, and reconcile invoices, as well as track related payments end to end.
Know Your Business (KYB) is a set of verification procedures that helps companies avoid getting into business with criminals.
Month-end close is a critical process where the accounting team reviews and records financial transactions to close out the month.
Payment operations is an umbrella term that refers to the entire lifecycle of money movement for a company.
While both are essential for managing online transactions, there are several differences between payment processors vs. payments gateways.
Two options for financial transaction settlement—differing in both speed and style—here, we’ll look at how both Net Settlement and Gross Settlement work in action.
Incoming payment details are notifications that a company is going to receive a payment it didn’t originate—meaning the receiving funds were not initially requested.
Payment controls help accounts payable (AP) departments avoid losing money due to fraud, late payment fees, and other errors. They are a necessary part of a company’s overall payment operations to keep payments secure, accurate, and authorized.
Payment rails are the underlying systems and networks that facilitate the movement of funds between parties in financial transactions.
Account-to-Account (A2A) banking, sometimes also called Me-to-Me banking, is the transfer of funds from one account to another account.
Implementing a multi-bank strategy is vital for companies looking to reduce risk exposure. In this article we explain how to reduce financial risk by implementing bank redundancy.
Batch processing is a method of processing various types of transactions. As the name suggests, transactions are processed in a group or “batch.”
In business terms, float refers to the time delay between the movement of funds from one account to another.
Know Your Customer or Know Your Client (KYC) is a set of guidelines for verifying the identity of a customer and gauging the associated risk of working with them.
Money transmission is the act of one party receiving currency for the purpose of sending it over to another party.
The 10-K is a comprehensive report mandated by the U.S. Securities and Exchange Commission (SEC) that publicly traded companies must file annually. This report provides a thorough overview of a company's financial performance over the past year.
A merchant’s bank account must pay an interchange fee to the card-issuing bank each time someone uses a credit or debit card to purchase something from their store.
Subscribe to Journal updates
Discover product features and get primers on the payments industry.