Reasons for Preparing a Bank Reconciliation
There are several reasons for a company to prepare a bank reconciliation:
- To safeguard the company’s cash. Performing a bank reconciliation results in improved internal control over the company’s cash if the reconciliation is done by someone other than the person handling and/or recording receipts and payments. Having this additional person prepare the bank reconciliation reduces the odds of an improper use of the company’s cash.
- To improve the confidence that the amount of cash that is reported on the company’s balance sheet is accurate. The additions and deductions on the bank statement are compared (or reconciled) with the items that are entered in the company’s general ledger Cash account. Some differences, such as outstanding checks and deposits in transit, are noted as simply timing differences.
- Since most companies use the double-entry system of accounting, any omission or error in the company’s general ledger Cash account also means that at least one other general ledger account will have a corresponding omission or error. For example, if a company had wired money from its bank account for emergency computer maintenance services and had not recorded the credit to its Cash account, it is also omitting the debit to the account Computer Maintenance Expense. The bank reconciliation could prevent this omission from occurring.
