What it means
Your accounting system and your bank both keep a record of your cash, and they are rarely identical on the same day. Timing gaps, bank fees, interest and errors all create differences.
A reconciliation lists those differences one by one until both sides agree to the dollar. The usual reconciling items fall into two groups.
Timing items, such as outstanding cheques and deposits in transit, will fix themselves once the bank catches up. Other items, such as bank charges, interest earned or a returned customer cheque, are things your records have not yet captured and need a journal entry.
The process matters because cash is the easiest asset to misuse. A regular reconciliation spots duplicate payments, missing deposits, keying errors and fraud early.
Auditors often ask to see the monthly reconciliations, and many lenders expect them. Good practice is to prepare the reconciliation soon after month-end, have someone other than the person who handles payments review it, and clear old reconciling items quickly.
An unexplained difference should be investigated the same week, not left to build up. Items that remain outstanding for months, such as an old uncashed cheque, need a decision about whether to cancel and re-issue.
Modern accounting software can match transactions automatically by amount and date. This saves time, but a person still needs to review the matches and the leftover items.
Automation does not decide whether an unmatched item is a timing difference or a genuine problem. For small businesses, the main benefit is confidence.
Owners who reconcile every month know their cash position is real, can answer questions from banks and investors quickly, and rarely face an unpleasant surprise when the tax return or audit arrives.
In practice
Real-world examples
Example 1
A property management company reconciles its operating account every month. The accountant finds a $2,400 rent receipt recorded twice in the cash book, which had hidden a shortfall. Once the duplicate is removed, the reconciliation balances and the owner is told the correct figure. The accountant also adds a check that flags any receipt with the same amount and tenant name within a month.
Example 2
A restaurant group reconciles each of its eight bank accounts weekly because of heavy cash and card activity. The finance clerk spots a $780 card settlement that never arrived. A call to the processor traces the missing payment to a wrongly keyed account number. The processor corrects the error and the money arrives two days later.
Example 3
A charity prepares year-end accounts for its auditors and finds a bank charge of $125 that was never recorded. The reconciliation shows the charge, and a journal entry fixes the cash book. The auditors accept the cash balance without further queries. The finance lead adds the reconciliation to the year-end checklist so the same gap does not appear again.
Think of it
Bank reconciliation is like balancing your checkbook. You're making sure what you think you have matches what the bank says you have.
Formula
Calculation
Adjusted bank balance = Bank statement balance + Deposits in transit - Outstanding cheques
Adjusted book balance = Cash book balance + Interest earned - Bank charges - Returned cheques
The two adjusted figures must be equal.
A company's bank statement closes at $48,200 and its cash book shows $47,350. It has deposits in transit of $3,000 and outstanding cheques of $4,150. The bank also charged $50 in fees and credited $900 of interest that the cash book has not yet recorded. Adjusted bank balance = 48,200 + 3,000 - 4,150 = $47,050. Adjusted book balance = 47,350 + 900 - 50 - 1,150 (a customer cheque that bounced) = $47,050. Both sides now agree.Case study
Seen in the real world
Brightwater Studios is a fictional design agency that stopped reconciling its bank account during a busy growth year. By the time the new finance manager arrived, the cash book and bank statement were $18,600 apart and nobody knew why.
She rebuilt the reconciliation month by month. The work uncovered a supplier paid twice, four unrecorded bank charges and a customer receipt posted to the wrong client. This illustrative case shows why a reconciliation done monthly takes an hour, while one left for a year can take a week.
Watch out
Common mistakes
- Forcing the reconciliation to balance with a plug figure. An unexplained difference should be investigated, not hidden.
- Letting the same person who makes payments also prepare the reconciliation. Splitting the duties reduces the chance of undetected fraud.
- Reconciling only at year-end. Errors are far easier to trace when the period is short.
Questions
People also ask
How often should a bank reconciliation be done?
At least monthly for most businesses, and weekly or daily for companies with high transaction volumes.
What is a reconciling item?
It is any transaction or amount that explains why the bank balance and the cash book balance differ on a given date.
Does an unreconciled account mean fraud?
Not necessarily, as most differences are timing or posting errors, but an unexplained difference should always be investigated.
Watch