Final answer:
A bank reconciliation is performed to ensure a company's book balance matches the bank balance, helping to identify and correct discrepancies. Reasons for differences might include outstanding checks, deposits in transit, and bank fees or errors. The bank activity can be interpreted through a balance sheet by looking at assets and liabilities.
Step-by-step explanation:
Purpose of Bank Reconciliation
The purpose of bank reconciliation is to ensure that a company's financial records (‘book balance’) match the transactions recorded by the bank (‘bank balance’). By reconciling the two, discrepancies can be identified and rectified. This process verifies the integrity of a business's financial transactions and keeps track of cash flow.
Possible Reasons for Differences
- Outstanding Checks: Checks issued by the company that have not yet been cleared by the bank can cause a difference between the book and bank balance.
- Deposits in Transit: Deposits made by a company that have not yet been recorded by the bank can create a discrepancy.
- Bank Fees and Errors: The bank may charge fees or make errors in recording transactions, which need to be accounted for in the company's books.
Interpreting Bank Activity through Balance Sheets
To interpret and show bank activity through balance sheets, one examines the assets, which may include loans, bonds, and reserves, against liabilities, such as deposits. The net worth of a bank is calculated by subtracting liabilities from assets.