A bank reconciliation proves that the cash balance in your books agrees with the balance on your bank statement, or explains every difference between them. It is one of the most valuable routine controls in accounting. It catches errors, exposes fraud and keeps your cash figure reliable.
Why the two balances differ
Your ledger and your bank statement record the same money at different times, so they rarely agree on any given day. Differences come from four sources:
- Deposits in transit. You recorded a receipt, but the bank has not yet credited it.
- Outstanding payments. You recorded a payment, but it has not yet cleared the bank.
- Items the bank recorded that you have not. Examples are bank charges, interest, direct debits and direct receipts.
- Errors. A transposed number or a duplicated entry can sit on either side.
The method
- Agree the opening position. Start from the statement balance and ledger balance at the end of the previous reconciliation. If last period was reconciled, the starting point is already explained.
- Match each statement line to a ledger entry. Work through the statement and tick off every line that appears in your books for the same amount.
- List what is unmatched on the statement. Each of these items is either something you must now record, such as a bank fee, or an error to investigate.
- List what is unmatched in the ledger. These are usually deposits in transit and outstanding payments. Confirm they clear in the next few days.
- Record the missing entries. Post the bank charges, interest and other items that belong in your books.
- Prove the reconciliation. The adjusted statement balance must equal the adjusted ledger balance. If it does not, something is still unexplained.
A worked example
The figures below are illustrative only. They show how the two sides come to the same number.
| Item | Amount |
|---|---|
| Balance per bank statement | 10,450 |
| Add: deposit in transit | 1,200 |
| Less: outstanding payment to supplier | (900) |
| Adjusted bank balance | 10,750 |
| Balance per ledger | 10,820 |
| Less: bank charges not yet recorded | (30) |
| Less: direct debit not yet recorded | (40) |
| Adjusted ledger balance | 10,750 |
Both sides arrive at 10,750, so the account is reconciled. The bank charge and the direct debit must then be posted to the ledger, while the deposit in transit and the outstanding payment are left to clear in the next period.
Habits that make it easier
- Reconcile often. Monthly is the minimum for most businesses, and weekly or daily suits those with many transactions. Small differences are easier to find than large ones.
- Separate duties where you can. The person who reconciles should not also be the person who approves payments. In a small team, have an owner or manager review the completed reconciliation.
- Investigate old items. A payment that has been outstanding for months may have been lost, or may be a sign of a problem. Do not leave stale items sitting in the list.
- Never plug a difference. Forcing the balance with an unexplained adjustment removes the control's value. Find the cause.
Foreign-currency bank accounts
Reconcile a foreign-currency account in its own currency first, since that is the currency the bank reports in. Exchange-rate differences then arise when your books translate the balance into your reporting currency. Revaluing foreign-currency balances at the period-end rate is a separate step, and it should follow the policy of your accounting framework.
Common mistakes
- Reconciling to the wrong date, so that statement and ledger are not compared at the same cut-off.
- Ticking an entry as matched because the amount is close rather than exact.
- Forgetting recurring bank charges or interest, which repeat every month.
- Treating a reconciliation as finished when the difference is "small".