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A bank reconciliation matches every transaction on the bank statement to a corresponding entry in the general ledger, accounting for timing differences like checks that haven’t cleared yet or deposits still in transit. When the adjusted balances match exactly, the books are reconciled; when they don’t, that gap is a signal — a miscoded transaction, a missing entry, or in the worst case, fraud — that needs to be tracked down before the month is closed.

Reconciliation isn’t limited to cash: grant balances, restricted fund totals, and payroll liability accounts all benefit from the same discipline of comparing the ledger to an independent source and explaining any variance.

Doing this monthly, rather than saving it for year-end audit prep, is what turns reconciliation from a forensic exercise into routine hygiene — and it’s one of the internal controls auditors specifically test as part of evaluating segregation of duties and overall financial oversight.

Every dollar a nonprofit holds either sits in a restricted fund — governed by a donor’s specific terms — or is unrestricted, available for any legitimate organizational purpose. A restricted fund isn’t a separate bank account; it’s a tracking mechanism within the general ledger that keeps a given grant or gift’s balance, purpose, and remaining availability visible at all times, even while the cash itself sits in one shared operating account.

Good fund-accounting practice means every transaction touching a restricted fund carries that fund assignment on the ledger entry itself, so a report can always answer, instantly, “how much of the Smith Family grant is left, and what’s it allowed to be spent on?” without someone manually reconstructing the answer from memory or a spreadsheet.

Spending restricted fund money on anything other than its designated purpose — even temporarily, with a plan to “pay it back” later — is a compliance risk serious enough that it’s one of the first things an auditor or grant reviewer checks.