An essential task of bookkeeping is making sure the ledger accounts for cash reconcile to the bank. Your average person believes that this is a monthly task. Well in the private world, this may be true. But in small business, this is a daily task.
Bank reconciliation is a process that generates a report that compares the existing bank balance adjusted by outstanding items (uncashed checks, missing withdrawals, missing deposits) to the cash ledger in the books of record for a business. The cash ledger is adjusted by unrecorded items including bank activity that has yet to be posted to the books (deposits, withdrawals and loan payments).
Historically the only two forms of payment were either cash or check. Then credit card payments became very popular in the eighties and today the preferred method is debit. Debit payments are an instaneous removal of value from the customer’s account and suspended by the banking system until deposited into the business checking account.
In accounting there are books (journals) and ledgers for source entry of information. A trial balance is used to monitor the types of accounts. With the use of parent-child accounts and control accounts bookkeepers can generate a wide array of reports. Unfortunately this still lacks the breath of supporting information needed. So the profession uses schedules to augment the reports.
The bank reconciliation is a daily accounting function for every small business. In order to fully appreciate its value, the small business owner needs to understand the fundamentals of how bank reconciliations are performed. In addition, there are some higher level types of transactions that affect the cash position.