What is the purpose of performing a bank reconciliation?

• A. To forecast cash flow
• B. To match cash balances with the bank statement and identify outstanding items and errors
• C. To set internal transfer limits
• D. To prepare tax payments

Answer: (B)

Bank reconciliation is the process of aligning the company’s cash records with the bank’s records. The purpose is to match the cash balance in the ledgers with the amount shown on the bank statement and to explain any differences. This includes identifying outstanding items like checks issued but not yet cleared and deposits in transit, as well as catching any errors on either side. By doing this, you keep the cash balance accurate, support reliable financial reporting, and spot discrepancies or potential fraud early.

Other options don’t fit the purpose: forecasting cash flow is about planning future cash, not reconciling actual balances; setting internal transfer limits relates to internal controls, not reconciling bank activity; and preparing tax payments is a separate compliance task, not the reconciliation process.