What Is Bank Reconciliation?

Bank reconciliation is the process of comparing your company’s internal cash records (the cash book or accounting ledger) with the bank’s official statement to make sure they match. If they don’t match — and they often don’t — you identify and explain every difference.

Think of it as a monthly health check for your cash account. It catches errors, detects fraud, and ensures your records are accurate before you prepare financial statements.

Why Your Cash Book and Bank Statement Usually Differ

It’s completely normal for these two records to show different balances at any given point in time. The most common reasons:

Timing Differences

• Outstanding checks (unpresented checks) — Checks you’ve written and recorded in your books, but the recipient hasn’t deposited yet. Your bank doesn’t know about them.
• Deposits in transit — Cash or checks you’ve deposited (and recorded), but the bank hasn’t processed yet — typically the last deposit of the month.

Bank-Initiated Items (Not Yet in Your Books)

• Bank charges and fees — Monthly service fees, wire transfer charges, overdraft fees the bank deducts automatically
• Direct credits — Interest earned on your account, direct deposits from customers that you haven’t yet recorded
• Returned (bounced) checks — A customer’s check that was deposited but bounced; the bank reverses the deposit
• Direct debits — Automatic payments (insurance premiums, loan installments) the bank processes without a manual check

Errors

• Your errors — Transposition errors ($459 recorded as $495), entering the wrong amount, posting to the wrong account
• Bank errors — Rare, but banks do occasionally credit or debit the wrong account

Step-by-Step: How to Prepare a Bank Reconciliation

You’ll work with two starting points: the closing balance per bank statement and the closing balance per your cash book. You adjust both to arrive at the same “adjusted balance.”

Step 1 — Adjust the Bank Statement Balance

1. Start with the closing balance on the bank statement
2. Add deposits in transit (recorded in your books, not yet on bank statement)
3. Deduct outstanding checks (issued by you, not yet cleared at the bank)
4. Result = Adjusted Bank Balance

Step 2 — Adjust the Cash Book Balance

1. Start with the closing balance in your cash book
2. Add any bank credits not yet in your books (interest earned, direct deposits)
3. Deduct any bank charges not yet in your books (service fees, bounced check fees)
4. Correct any errors in your cash book
5. Result = Adjusted Cash Book Balance

Step 3 — Verify They Match

The Adjusted Bank Balance must equal the Adjusted Cash Book Balance. If they don’t match, keep investigating until you find the remaining difference.

Worked Example

Journal Entries After Reconciliation

Any adjustments made to the cash book side need to be recorded as journal entries in your accounting system:

Note: Items on the bank statement side (deposits in transit, outstanding checks) are already in your books — they just haven’t hit the bank yet. No journal entries are needed for those.

How Often Should You Reconcile?

• Monthly is the minimum standard for most businesses
• Weekly for high-volume businesses or those with fraud risk
• Daily for businesses processing large cash volumes (retail, restaurants)

Key Takeaways

• Bank reconciliation compares your cash book balance to the bank statement balance and explains the differences
• Differences arise from timing (outstanding checks, deposits in transit) or items not yet recorded (bank charges, direct credits)
• Both the bank side and cash book side are adjusted to reach the same final “adjusted balance”
• Only cash book adjustments require journal entries — timing differences do not
• Regular reconciliation is a critical internal control that deters fraud and catches errors