What it means
Two different records exist for the same account. The book balance, sometimes called the cash book or general ledger balance, reflects every transaction you have recorded, while the bank balance reflects only what has actually settled through the banking system.
Timing differences explain most of the gap. Outstanding cheques reduce your book balance the day you write them but reduce the bank balance only when the recipient banks them, and deposits in transit do the reverse.
The rest of the gap comes from items the bank knows about and you do not yet. Bank charges, interest credited, direct debits taken and returned payments all hit the bank statement before anyone records them in the ledger.
This is why the book balance is the number to manage against, but only once it is up to date. Paying suppliers on the strength of a bank balance that still includes funds already committed to unpresented cheques is one of the more common routes into an unplanned overdraft.
Reconciliation is also a fraud control, not just a tidying exercise. Payments that appear on the statement with no matching entry in the books, or ledger entries with no corresponding bank movement, are exactly the pattern that unauthorised payments and misposted entries produce.
In practice
Real-world examples
Example 1
A construction firm's book balance is $84,000 while the bank shows $131,000, because subcontractor cheques worth $47,000 are still in the post. The finance manager blocks new spending against the bank figure, since that cash is already committed.
Example 2
A charity finds a $2,400 direct debit on its statement with no ledger entry. Investigation shows a cancelled software subscription that the supplier kept collecting, and the reconciliation recovered eight months of overcharges.
Example 3
An online retailer reconciles daily rather than monthly because card settlements arrive two days after the sale. The two day lag between recorded income and cleared cash is a permanent feature of its book balance, not an error.
Think of it
Your book balance is like the tally of steps on your fitness tracker, while your actual physical location is your bank balance. The tracker knows you started moving, but it takes a moment for reality to catch up with the device.
Formula
Calculation
Adjusted bank balance = bank statement balance + deposits in transit - outstanding cheques
Adjusted book balance = book balance + credits not yet recorded - charges not yet recorded
The two adjusted figures must agree.
At month end a company's bank statement shows $51,700. Two cheques totalling $6,200 have been issued but not presented, and a $3,000 customer deposit was banked on the last day and has not yet cleared.
Adjusted bank balance = $51,700 + $3,000 - $6,200 = $48,500.
The company's cash book shows $48,600. The statement also carries a $150 bank charge and $50 of interest earned, neither of which has been posted to the ledger.
Adjusted book balance = $48,600 - $150 + $50 = $48,500. The two agree at $48,500, the reconciliation is complete, and the $150 charge and $50 interest are now posted so the book balance is correct going forward.Case study
Seen in the real world
This is an illustrative and entirely fictional example. Pemberly Interiors, an invented furniture fit out business, ran on a simple rule: the office manager checked the online bank balance each Friday and released supplier payments if it looked comfortable. Nobody reconciled the cash book to the statement, and the ledger drifted out of date by weeks.
In March the account showed $96,000 on a Friday morning, so $70,000 of supplier payments went out. What the screen did not show was $58,000 of cheques already written to trade contractors and a $9,000 quarterly insurance direct debit due the following Tuesday. The true book balance was closer to $29,000, the account went $41,000 overdrawn, and the fictional company paid roughly $1,800 in unarranged overdraft charges and returned payment fees in one month.
The fix was procedural rather than clever. Pemberly moved to a weekly reconciliation, added a schedule of unpresented cheques and known standing payments to its cash report, and made the adjusted book balance, not the online bank figure, the number authorising payment runs.
Watch out
Common mistakes
- Treating the online bank balance as available cash when unpresented cheques and imminent direct debits have already spoken for part of it.
- Forcing a reconciliation to balance with an unexplained adjusting entry instead of finding the item causing the difference.
- Reconciling only at the year end, by which point errors and unauthorised payments are months old and much harder to trace.
Questions
People also ask
Why does the bank balance differ from the book balance?
Because of timing differences such as unpresented cheques and deposits in transit, plus bank items like charges and interest that have not yet been recorded in the ledger.
Which balance goes in the financial statements?
The reconciled book balance, once all genuine bank items have been posted, since it reflects every transaction the business has entered into.
How often should a business reconcile?
Monthly is the minimum for most companies, while businesses with high transaction volumes or thin cash headroom benefit from weekly or daily reconciliation.