What it means
Every business keeps its own record of what it has paid and received. The bank keeps a separate one.
The two should agree once timing differences are allowed for, and the bank statement is the evidence against which the business's cash records are checked. Because the bank prepares it independently, it is the control that catches errors and frauds in the business's own books: a payment recorded but never made, a receipt never recorded, a duplicate, a transposed figure, or cash taken by someone with access to the account.
A statement's contents are simple but each element has a use. The opening and closing balances anchor the reconciliation.
Each transaction line identifies the counterparty, the amount, the date the bank processed it and often a reference, which is what allows it to be matched to an invoice, a payroll run or a customer payment. Fees, interest and bank charges are usually first seen on the statement and must be recorded in the ledger from it.
Direct debits, standing orders and card payments the business has not separately recorded are picked up here. And the running balance, read across the month, shows the cash position at every point, which is the raw material of cash forecasting.
Beyond bookkeeping, statements are evidence. Lenders ask for six to twelve months of statements to see a business's real cash flows, which are harder to dress up than accounts.
Auditors obtain statements directly from the bank to confirm balances. Tax authorities compare statements with declared income.
Buyers of businesses read them to verify that reported revenue actually arrived. And in fraud investigations, the statement is often the first document that shows where the money went.
Modern bank feeds deliver statement data into accounting systems daily or in real time, with automatic matching of transactions to invoices and bills. This has made reconciliation faster and more frequent, but it has not removed the need for it: the feed still has to be reviewed, unmatched items investigated, and the closing balance agreed to the bank's own figure.
In practice
Real-world examples.
Example
A small business owner downloads the monthly statement, ticks each line against the accounting software's bank feed, and investigates a $480 payment to a supplier she does not recognise, which turns out to be a subscription renewed automatically.
Example
A lender reviewing a loan application asks for twelve months of statements and notes that the applicant's stated monthly revenue of $60,000 is supported by average monthly credits of $58,000.
Example
An auditor obtains a year-end bank confirmation directly from the bank and agrees it to the closing balance on the December statement and to the reconciliation.
Think of it
“A bank statement is your account's report card from the bank-showing all activity for the period.
Formula
Calculation
Closing Balance per Statement = Opening Balance + Total Credits (deposits and receipts) minus Total Debits (payments, fees and charges)
Adjusted Bank Balance (for reconciliation) = Statement Closing Balance + Deposits in Transit minus Outstanding Payments
Worked example. A consultancy's bank statement for March shows:
- Opening balance 1 March: $32,400
- Credits: client payments $118,000; interest $40; total $118,040
- Debits: payroll $61,000; supplier payments $28,500; rent $6,000; direct debit for insurance $1,450; card payments $2,300; bank fees $95; total $99,345
- Closing balance 31 March: $32,400 + $118,040 minus $99,345 = $51,095
The consultancy's ledger shows a bank balance of $47,300. Reconciliation:
- Deposits in transit (a $9,000 client payment recorded on 31 March, credited by the bank on 1 April): add to statement balance
- Outstanding payments (two supplier cheques totalling $14,200 issued in March, not yet presented): subtract from statement balance
- Adjusted bank balance = $51,095 + $9,000 minus $14,200 = $45,895
- Items on the statement not in the ledger: insurance direct debit $1,450, bank fees $95, interest $40. Ledger adjustment = minus $1,450 minus $95 + $40 = minus $1,505
- Adjusted ledger balance = $47,300 minus $1,505 = $45,795
The two adjusted balances differ by $100. Checking the card payments line by line finds one recorded in the ledger as $330 that the statement shows as $230; the ledger overstated the payment by $100. Correcting it brings the adjusted ledger balance to $45,895, which agrees with the adjusted bank balance. The reconciliation produces three ledger entries from the statement (insurance $1,450, fees $95, interest $40) and one correction (the card payment), and the two deposits and cheques in transit are carried forward to be ticked off on April's statement. The whole exercise takes twenty minutes.Case study
Seen in the real world.
A charity's treasurer had for years received the bank statements, prepared the reconciliation and presented a one-line "bank balance agrees" to the trustees. When she retired, her successor found that the reconciliation had not been prepared for two years; the statements had been filed unopened. Working through them, he found $38,000 of unauthorised payments to an online retailer, made with the charity's debit card by a volunteer who had been given the card for event purchases and never returned it.
Each payment was under $500 and none had been queried because no one had read the statements. The charity recovered part of the loss through its insurer, changed its banking to require two approvals for payments, cancelled all cards, and adopted a rule that the monthly statement and reconciliation are reviewed and initialled by a trustee who does not handle money. The new treasurer's report to the board noted that the bank had sent a complete record of the fraud every month, addressed to the charity.
Watch out
Common mistakes.
- Filing statements without reconciling them. The statement only protects the business if someone compares it with the books.
- Recording fees, interest and direct debits only when they appear on the statement, months late, rather than at each reconciliation.
- Relying on the bank feed's automatic matching without reviewing unmatched and suspicious items.
Questions
People also ask.
How often should bank statements be reconciled?
Monthly at least; weekly or daily for businesses with high transaction volumes or tight cash.
What is the difference between the statement balance and the available balance?
The statement balance is the bank's ledger figure at a date. The available balance excludes uncleared deposits and includes any overdraft facility, and is what can actually be spent.
How long should bank statements be kept?
Most tax authorities require accounting records, including statements, to be kept for five to seven years; some regulated businesses must keep them longer.
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