Bank reconciliation is the process of comparing a company's internal cash records (general ledger) with the bank statement to identify and resolve differences. It ensures that the cash balance reported in financial statements is accurate and that all transactions have been properly recorded.
In Depth
Bank reconciliation is one of the most fundamental financial controls. It verifies that every pound in and out of the business is properly recorded, catches errors and omissions, and can detect fraudulent transactions.
The reconciliation compares the GL cash account balance to the bank statement balance. Differences arise from timing (cheques issued but not cleared, deposits in transit), unrecorded items (bank charges, interest, direct debits not yet posted), and errors (incorrect amounts, duplicate entries).
Modern accounting software and banking APIs have automated much of the bank reconciliation process. Bank feeds import transactions directly into the accounting system, matching algorithms identify likely matches, and the reconciliation focuses on exceptions rather than manual line-by-line comparison.
For FP&A teams, an accurate bank reconciliation is essential because the cash position underpins cash flow forecasting, runway calculations, and liquidity management. An unreconciled cash balance means the FP&A team is working with unreliable data.
For UK businesses, bank reconciliation should account for: direct debit payments to HMRC (PAYE, VAT, corporation tax), standing orders for rent and other regular payments, bank charges and interest, and any foreign currency accounts. Companies with multiple bank accounts must reconcile each one.
Real-World Example
A UK company reconciles its main business account monthly. The GL shows £856K; the bank statement shows £842K. The £14K difference comprises: £8K in cheques issued but not yet cleared (timing), £4K bank loan repayment via direct debit not yet posted (missing entry), and £2K foreign exchange charge not yet recorded (missing entry). The accountant posts the two missing entries, reducing the reconciling difference to £8K of timing items that will clear in the following month.
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