Bank Reconciliation

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Bank Reconciliation

A bank reconciliation compares your internal cash records (books) with the bank’s records to identify and resolve differences. It ensures the accuracy of your financial records, detects fraud or errors, and improves cash management.

Why perform a bank reconciliation?

  • Identify and correct bookkeeping or bank errors (wrong amounts, omitted transactions).
  • Detect unauthorized or fraudulent transactions.
  • Verify cash balances and improve balance-sheet accuracy.
  • Track bank fees, interest, and other charges for accurate expense reporting.
  • Confirm accounts receivable collections and outstanding payments.

How often to reconcile

  • Monthly is standard for most individuals and small businesses (after receiving the bank statement).
  • For high-volume operations, reconcile weekly or daily to manage cash flow and catch issues quickly.

Step-by-step reconciliation process

  1. Gather documents
    Collect the bank statement(s) for the period and your internal records (cash book, general ledger, check register, deposit slips, invoices).

  2. Compare balances and transactions

  3. Match deposits and credits on the bank statement with entries in your books.
  4. Match withdrawals, checks, payments, fees, and bank charges.

  5. Note transactions that appear in one record but not the other.

  6. Investigate outstanding items

  7. Outstanding checks: checks recorded in your books but not yet cleared by the bank.
  8. Deposits in transit: deposits recorded in your books but not yet reflected on the bank statement.

  9. Bank-only items: fees, interest, NSF charges, or corrections that appear on the bank statement but not in your books.

  10. Make adjustments

  11. Adjust the bank statement balance by adding deposits in transit and subtracting outstanding checks and bank errors.
  12. Adjust the book balance for items the bank recorded (fees, interest, returned items) and for any bookkeeping mistakes you find.

  13. Repeat comparisons until the adjusted bank balance equals the adjusted book balance.

  14. Document and retain records

  15. Keep the reconciled statement, supporting documents, and notes about adjustments.
  16. Maintain a clear audit trail for future reviews and audits.

Tip: Know your bank’s policy and deadlines for reporting errors or fraud—some banks limit disputes to a set period (often around 60 days).

Example (illustrative)

Company ledger shows an ending cash balance of $145,000. During reconciliation you find:
– Deposits in transit: $10,000 (client payment) and $2,500 (cash deposit) = +$12,500
– Outstanding check: $15,000 (issued to supplier, not cleared) = -$15,000
– Bank service charge: $50 (on bank statement, not in books) = -$50
– Interest credited by bank: $100 (not in books) = +$100
– Correction for an erroneous deposit from prior month: $3,000 (bank adjustment) = -$3,000

Adjustments applied to the book balance:
145,000 + 12,500 – 15,000 – 50 + 100 – 3,000 = 139,550

After making corresponding adjustments on the bank statement (adding deposits in transit, subtracting outstanding checks, and accounting for bank errors), the adjusted bank balance should equal $139,550. When both adjusted balances match, the reconciliation is complete.

Best practices

  • Reconcile regularly and promptly.
  • Keep source documents (deposit slips, cancelled checks, receipts).
  • Use bank feeds or reconciliation features in accounting software to automate matching.
  • Separate duties where possible: the person reconciling should not be the same person making deposits or issuing checks.
  • Record reconciliations and retain them for audit trails.

Bottom line

Bank reconciliation is a routine but critical control that ensures your cash records are accurate, uncovers mistakes or fraud, and supports reliable financial reporting. Regular reconciliations, thorough documentation, and timely follow-up on discrepancies make cash management more reliable and reduce financial risk.