The bank reconciliation is an unsung hero of the accounting world.  It can protect you from fraud, act as a monitoring tool for your accounting operation, keep you in compliance with state laws and bank policies and give you the most accurate picture of available cash.  A bank reconciliation is a powerful tool and should be prepared every month, as soon as the bank statement is available.  

A bank reconciliation is a great overall monitoring tool.  It provides the business owner with a recap of the total cash inflows and outflows for the month and the true cash balance considering any items that may be in transit.  Cash receipt journals and check registers, which are the basis for the bank reconciliation, detail all customer receipts and vendor payments.  With so many details in one concise presentation, a business owner can scan the transactions for anything out of the ordinary or potentially fraudulent. 

The traditional bank reconciliation is a double-sided calculation with one side representing (business) book activity and the other side representing bank activity.  The book calculation takes into consideration all monies in and out of the account during the month.  The bank side summarizes transactions that have cleared the bank.   The difference between the two is commonly referred to as “in transit” or “outstanding” items and includes activity that has been processed on the business side, but has not cleared the bank, or vice versa. 

Bank reconciliations also offer a means to comply with state laws and bank policies.  Some states, Arizona being one, require businesses to report unclaimed property (including checks) that remain outstanding after one to three years, depending on the type of property.  Furthermore, banks often require customers to notify them within 30 days after receiving the bank statement in order to be covered for fraudulent related losses and the bank reconciliation process is a good oversight tool.