A bank reconciliation compares the cash balance in the business's own records against the balance the bank reports, and accounts for every difference - cheques not yet cleared, deposits in transit, bank charges not yet recorded, or errors.
What it means
The two balances rarely match on the day because of timing differences: a payment recorded in the books may take days to reflect on the bank statement. The reconciliation proves the cash figure on the balance sheet is correct once those timing items are identified and explained.
Where it fits in
Net pay paid out by EFT shows on the bank statement only once it clears, so the payroll-related cash movements are part of what a bank reconciliation has to account for each period.
Key rules
- Matches the cash book balance to the bank statement balance.
- Differences are timing items (outstanding cheques, deposits in transit) or errors.
- Performed each period before relying on the cash balance.
- Payroll EFT runs are among the cash movements it must reconcile.
