Bank reconciliation
Comparing the cash balance in the books with the bank statement, and explaining every difference between them.
In short
- Most differences are timing: cheques not yet cashed, deposits not yet cleared.
- What remains is what matters: missing entries, bank fees, errors or fraud.
- It is done at least monthly and is one of the first steps of the close.
A bank reconciliation proves that the cash account in the general ledger agrees with the bank. The two rarely match exactly on any given day, because the business and the bank record transactions at different times. The reconciliation lists every difference and shows that, once those are accounted for, the balances agree.
Typical reconciling items
- Outstanding cheques: written and recorded in the books but not yet cashed by the payee.
- Deposits in transit: recorded in the books but not yet credited by the bank.
- Bank fees and interest: on the statement but not yet in the books.
- Direct debits and receipts: automatic payments or customer transfers the books have not picked up.
- Errors: amounts keyed wrongly or posted to the wrong account.
Why it matters
Cash is the one balance that can be checked against an outside source every month. A reconciliation that is done regularly catches missing transactions, duplicate entries, unauthorized payments and bank errors while they are recent enough to fix. One that is left for months turns into an archaeology project.
Many businesses now reconcile continuously through bank feeds, matching each bank transaction to its entry as it arrives, which leaves only the exceptions for month end.
Worked example
Two balances that agree
At April 30, the bank statement shows $48,920 and the ledger shows $46,365. Outstanding cheques total $4,100 and a $1,500 deposit made on the 30th hasn't cleared. The adjusted bank balance is $48,920 − $4,100 + $1,500 = $46,320. The statement also shows a $45 bank fee that was never recorded. Booking it brings the ledger to $46,365 − $45 = $46,320. The two balances agree, and every difference has an explanation.