During normal bookkeeping operations errors are made. In order to insure integrity of the accounts a reconciliation must take place.
Reconciliation is a process by which differences between the two accounts are itemized.
One of the most common accounts that get reconciled on a regular basis are the bank accounts.
Example:
Bank statement has the following entries:
Beginning Balance $2,000
Car Payment -$500
Payroll -$800
Deposits $2,000
Ending Balance $2,700
General Ledger has the following entries:
Beginning Balance $2,000
Cr. Car Expense $500
Cr. Payroll Expense $400
Dr. Deposits $2,000
Ending Balance $2,300
It is evident that an error was made during the period. Depending when reconciliation is performed, an error booking the payroll entry may have to be entered in a future period as an adjustment. For the current period a reconciliation will look like this:
The beginning always states the balance of what you are trying to reconcile. In this case it is the GL:
Ending GL balance $2,300
Underneath you will list all items outstanding that cause the difference between the two accounts:
Payroll Adjustments $400
Closing Bank balance: $2,700 (i.e. $2,300 +$400 = $2,700 which equals actual bank closing balance)