Accounting and bookkeeping
Bank reconciliation
Bank reconciliation is the process of matching the cash balances in your business accounting records to the corresponding information on your official bank statement to identify and correct any discrepancies.
What is Bank reconciliation?
Bank reconciliation involves comparing your internal financial records against the official statement provided by your bank. Because you record transactions when they occur, and the bank records them when they clear, the two balances rarely match perfectly at the end of the month. These timing differences are completely normal. For example, you might have outstanding cheques that you have written but the supplier has not yet cashed. Similarly, you might have deposits in transit that you received late in the day and have not yet appeared on the bank's system. The bank might also deduct routine bank charges or add interest that you have not yet booked in your ledger. By identifying these differences, you ensure your cash balance is accurate and ready for financial reporting.
Ending Bank Balance + Deposits in Transit - Outstanding Cheques = Adjusted Balance
This adjusted bank balance must equal your internal ledger balance after you deduct unrecorded bank fees and add earned interest.
How Bank reconciliation works
The reconciliation process begins by obtaining your most recent bank statement and opening your cash book or general ledger for the same period. You start by ticking off every transaction that appears in both places. Once you match the identical items, you focus on the remaining un-ticked entries. First, you add any missing bank fees, interest payments, or direct debits to your own accounting records. Next, you list the timing differences, such as uncleared cheques and pending deposits, which explain the remaining gap between the two balances. Finally, you calculate the adjusted balance for both the bank statement and your ledger. When these two adjusted figures match exactly, your account is successfully reconciled and your financial records are accurate.
- Compare your internal cash ledger balance against your official bank statement balance.
- Mark all matching deposits and withdrawals that appear in both sets of records.
- Record any bank fees or interest payments that are missing from your ledger.
- Identify deposits in transit that the bank has not yet processed.
- List outstanding cheques that payees have not yet presented for payment.
- Calculate the adjusted balances to ensure both totals match perfectly.
Worked example
Gulf Trading LLC shows a cash ledger balance of 10,600. Their monthly bank statement shows an ending balance of 11,500. The bookkeeper identifies a 2,000 deposit in transit that has not cleared the bank yet. They also find 3,100 in outstanding cheques written to suppliers, and a 200 monthly bank service fee not yet recorded in the ledger. To reconcile, the bookkeeper adjusts the bank balance: 11,500 + 2,000 (deposits) - 3,100 (cheques) = 10,400. Then, they adjust the ledger balance: 10,600 - 200 (fees) = 10,400. Both adjusted balances equal 10,400, meaning the account is fully reconciled.
Why it matters for your business
Performing a regular bank reconciliation is vital for maintaining an accurate picture of your available cash. If you skip this process, you risk bouncing cheques or failing to pay suppliers because your ledger shows money that is not actually in the bank. It also acts as your primary defence against fraud and billing errors. By reviewing every transaction, you can quickly spot unauthorised withdrawals, duplicate charges, or missing deposits. Paper & Pen posts journal entries. Ultimately, reconciled accounts are essential for filing accurate tax returns and securing business loans.
See also
Questions
Common questions
How often should I do a bank reconciliation?
What happens if my bank reconciliation does not balance?
Related terms
- General ledger A general ledger is the master accounting record of a business, containing all financial transactions categorised by account to track assets, liabilities, equity, revenue and expenses.
- Cash flow statement A cash flow statement is a financial report that shows the exact amount of money entering and leaving your business over a specific period, helping you track your actual liquidity.
- Double-entry bookkeeping Double-entry bookkeeping is a fundamental accounting method where every financial transaction requires at least two equal and opposite entries to keep the accounting equation perfectly balanced.
- Trial balance A trial balance is an internal accounting report that lists the closing balances of all general ledger accounts to verify that total debits equal total credits.
- Accounts payable Accounts payable is the total amount of short-term debt your business owes to suppliers and vendors for goods or services that you have received but have not yet paid for.
- Accounts receivable Accounts receivable represents the total amount of money owed to a business by its customers for goods or services that have been delivered but not yet paid for.