What Is Bank Reconciliation?

Bank Reconciliation: Definition, Examples and a Guide

Bank reconciliation involves checking the balances and transactions appearing in your accounting books against those in a bank statement — then identifying discrepancies and adjusting accordingly to make both sets of records agree. Fundamentally, bank reconciliation serves to verify cash balances, identify mistakes or fraud and validate that all transactions are properly documented.

Why bank reconciliation matters

Keeping accurate cash records is an essential basis of good financial management. A properly reconciled bank account: The business or individual who reconciles their bank account regularly: confirms that deposits cleared, checks cleared as expected, unauthorized transactions are caught and fees/interest/adjustments from the bank are entered into the accounting system. Without regular reconciliation, a seemingly small error can spiral into an unreflected financial report, uninformed decisions or lost payments.

Key items that create differences

Here are some reasons that might account for differences when you compare your ledger against a bank statement:

• Deposits in transit: Funds that are part of the balance on your books but have not yet shown up at the bank because you made the deposit late in the statement period.
• Outstanding checks: Checks you wrote and recorded but that the recipient hasn’t cashed by the bank’s statement date.
• Bank fees and charges: Monthly fees, check charges or penalties that have been drawn by the bank, but you have not recorded yet.
• Interest earned: interest credited by the bank and needs to be entered in your books
• Errors: Both you and the bank can make mistakes — whether that’s arithmetic errors in your ledger, or a miss-post by the bank.
• Returned or bounced checks: Only deposits you recorded, which were later taken back by the bank because of insufficient funds.

Step-by-step bank reconciliation process

1. Gather documents Collect the statement in question and your cash ledger or check register. If you use accounting software, create a cash account report for those same dates.
2. Beginning with balances: Make a note of the ending balance on the bank statement, as well as the ending balance in your books as of that statement date.
3. Identify timing differences: Add deposits in transit to the bank balance and subtract outstanding checks. These timing differences explain items recorded by you but not yet the bank.
4. Pencil in bank adjustments: Deduct bank fees and bounced checks from your book balance, adding any interest or direct credits the bank registered.
5. Look for errors: If the balances still don’t match up, check for mistakes like transposed numbers, transactions that were not entered or duplicate entries.
6. Make adjusting entries: Record corrections in your accounting records for fees, interest or mistakes you find. Make any journals needed to show actual cash.
7. Reconcile and record: Once adjustments are made, the adjusted bank balance must equal the adjusted book balance. An audit and internal control function is to maintain a reconciliation report history along with the supporting documents.

Practical example

For example, your book balance is $10,500 at the end of the month, but the bank statement shows $11,200. You do some digging and discover the following:

A $900 deposit towards the end of the month didn’t clear until the following day (deposit in transit).

There are outstanding checks worth $700 that haven’t been cashed.

The bank has charged a $15 service fee not yet reflected on your books.

The bank paid $10 of interest.

If you made a payment, adjust the bank (in-flow): $11,200 + $900 - $700 = $11,400.

How To Adjust the Book Balance $10,500 - $15 + $10 = 10495

The balances are still different at this point. Upon careful examination, there was a customer payment of $905 you recorded on your books, but the actual deposit reflected $950 — the error was an subtraction of $45. Fixing that mistake adds $45 to your book balance, for a total of $10,540. Another review shows a $1,860 check was accidentally entered as $1,690 in your books, under-recording by $170; once corrected the book balance is lowered to $10,370. This process of continuing to identify errors and making these corrections will ultimately reconcile the two balances. The example shows that reconciliation often necessitates both time shifts and error corrections.

Best practices for efficient reconciliation

• Reconcile regularly: Most companies reconcile monthly, but if your transaction volume is high, you might need to reconcile weekly.
• Maintain organized records: Clearly keep a check register, and deposit log, as well as receipts. Timely recording reduces discrepancies.
• Stick to a process: A step-by-step checklist reduces the chances of skipping over an important item.
• Separating duties: If one person records transactions, have another person review reconciliations, if possible, to reinforce controls.
• Keep records: Save all bank statements, deposit slips, and reconciliation reports for auditing purposes or future reference.

What common pitfalls to avoid and how to avoid them

Waiting too long: Large gaps between reconciliations make it more difficult to identify and recall the source of discrepancies.

Turning a blind eye to small discrepancies: Small uninvestigated amounts can be indicative of larger systemic problems or fraud.

Not recording bank charges: Unrecorded fees will skew cash reports over time.

Believing the bank is always correct: Banks may make mistakes; verifying both accounts is equally critical.

When to seek professional help

If reconciliation uncovers complex or repeated problems — such as checks returned often, withdrawals for which you have no explainable reason or discrepancies that won’t reconcile after reasonable inquiry — consult an accountant or financial professional. They may help detect process weaknesses, recommend remediating steps and implement tighter internal controls.

Conclusion

Bank reconciliation is a simple but extremely effective control with regards to the veracity of financial records. The regular exercise of comparing your books to bank statements, correcting timing differences, fixing errors and documenting adjustments gives you confidence in your cash position and minimizes the risk of receiving surprises. Establishing a regular reconciliation routine — whether in your personal finances or business — helps you to make better decisions and ensures more robust financial health.