What is a bank reconciliation?
A bank reconciliation compares two records of the same money: your cash book (or bank account in your accounting software) and the statement from your bank. They rarely match exactly on any given day, because of timing and items one side doesn't know about yet. Reconciling identifies and explains each difference.
Common reconciling items
- Deposits in transit: money recorded in your books but not yet shown by the bank.
- Outstanding cheques or payments: payments you've recorded that haven't cleared.
- Bank charges and interest: shown by the bank but not yet in your books.
- Direct debits and transfers you haven't recorded.
- Errors on either side, such as duplicated or mistyped entries.
Step-by-step
- Start with the closing balance on the bank statement.
- Add deposits in transit and subtract outstanding payments to get the adjusted bank balance.
- Start with the closing balance in your books.
- Add interest and unrecorded receipts; subtract bank fees and unrecorded payments to get the adjusted book balance.
- The two adjusted balances should match. Record journal entries for any book-side adjustments.
How often?
At least monthly, ideally weekly or daily for busy accounts. Modern accounting software with bank feeds can match most transactions automatically, leaving you to review exceptions.
Why it matters
- Confirms the cash figure on your balance sheet.
- Detects fraud, theft and unauthorised charges early.
- Catches missed invoices, duplicate payments and bank errors.
- Is one of the first things auditors and lenders check.