It’s typical for the bank statement to show a different month-end balance from your general ledger.
Now that online access to banking records is so prevalent, it’s easier to keep track of the differences. However, they still exist, and you need to understand why.
For one thing, you need to pick up bank charges and any interest earned. For another, there may be errors to deal with – yours or the bank’s – which must be identified and corrected by comparing the two sets of records. Finally – and most significantly – there are timing differences between when you initiate a transaction and when the bank sees it.
Your books record payments and deposits in the order in which you issue them. The bank’s records will also contain these amounts – but in the order in which they were presented at the bank. That might be quite a different thing!
Let’s say you issued a batch of cheques dated on the 25th of the month. Getting them signed and into the mail took a couple of days. Some payees may have received and banked their cheques before the 30th, but others won’t cash them till the new month. As far as your books are concerned, these cheques are all current month items – but from the bank’s point of view, some belong to this month and some to next.
Therefore, at the end of this month, the bank will have a higher balance than your books, because the bank doesn’t know what cheques may be in transit.
As this example demonstrates, it’s very important for you to keep your bookkeeping up to date, and use your balance rather than the bank’s. Once you’ve issued a payment, you need to assume the money is gone, even if it hasn’t cleared from your account. You don’t want to try spending the same money twice!
The same problem can happen with other transactions. The deposit you made at the ATM on Friday may not be processed by the bank until Monday. The online purchase you made, or the online donation that a supporter made from their home may be logged on your system today, but may not arrive in the bank’s records until tomorrow.
The tool that you need to understand is the bank reconciliation. It is the document that proves your bookkeeper has compared your general ledger to the bank statement, and identified all problems and timing differences to the penny. If you put your general ledger at your right hand, the bank statement at your left hand, and the bank rec document in the middle, you should be able to see your balance, the bank’s balance, and an itemized explanation of any differences.