Key takeaways
- A bank reconciliation proves the cash balance in your books matches the bank, after allowing for timing differences.
- Adjusted bank balance = statement balance + deposits in transit − outstanding checks. It should equal your adjusted book balance.
- Record bank-only items such as fees and interest in your books. Leave timing differences alone; they clear next month.
- Reconcile at least monthly, and investigate any difference rather than forcing the balance.
What is a bank reconciliation?
A bank reconciliation compares the transactions and balance in your accounting records with your bank statement for the same period, then explains every difference. When you’re done, you know your books show the cash you really have.
It’s the most important control in small business bookkeeping. Reconciling catches duplicate entries, missed transactions, bank errors and, occasionally, payments you never authorized.
How often should you reconcile?
At least once a month, as soon as the statement is available. If you have a lot of transactions, reconcile weekly. The smaller the period, the easier any difference is to find. Reconcile every account the business uses, including credit cards, savings accounts and payment processors.
How to reconcile a bank account, step by step
- Get the statement. Download the bank statement for the period and note its ending balance.
- Check the starting point. The opening balance on the statement should equal the reconciled balance from last month. If it doesn’t, fix last month first.
- Match deposits. Tick off each deposit on the statement against a deposit in your books.
- Match withdrawals. Do the same for checks, card payments, transfers and automatic debits.
- Record bank-only items. Anything on the statement that isn’t in your books, like bank fees, interest earned or an automatic payment nobody entered, should be recorded now.
- List timing differences. Items in your books that haven’t reached the bank yet, usually outstanding checks and deposits in transit, stay on the list. They’ll clear next month.
- Compare the adjusted balances. Adjust the statement balance for timing differences and compare it with your book balance after recording bank-only items. They should match exactly.
- Save the report. Keep the reconciliation report. Your CPA will want it at year end.
QuickBooks Online, Xero and Zoho Books all have built-in reconciliation tools that handle the matching. The thinking in steps 5 to 7 is still yours.
A worked example
Say your March statement shows an ending balance of $12,480.00, and your books show $11,615.00.
| Bank side | Amount | Book side | Amount |
|---|---|---|---|
| Statement balance | $12,480.00 | Book balance | $11,615.00 |
| Add: deposit in transit | 1,250.00 | Less: bank service fee | (25.00) |
| Less: outstanding checks | (2,130.00) | Add: interest earned | 10.00 |
| Adjusted bank balance | $11,600.00 | Adjusted book balance | $11,600.00 |
Both sides agree at $11,600.00, so the account is reconciled. You’d record the $25.00 fee and $10.00 interest in your books. The deposit and the checks need no entry; they’re timing differences.
When the balances don’t match
Work through these, roughly in order of how often they’re the cause:
- A missed or duplicated transaction. Look for amounts that appear twice in your books, or on the statement but not in the books.
- A transposed number. If the difference divides evenly by 9, two digits may have been swapped, such as $1,520 entered as $1,250.
- Half the difference. An amount equal to half the difference may have been entered with the wrong sign, as a deposit instead of a payment.
- Wrong account. A transaction posted to another bank or card account.
- Last month wasn’t right. If the opening balances don’t agree, the problem is in an earlier period.
Don’t force a reconciliation with an unexplained adjustment. An unexplained difference is exactly what reconciliation is meant to catch.
Red flags worth a second look
- Payees you don’t recognize, or familiar vendors with changed bank details
- Checks out of number sequence, or missing check numbers
- Round-number transfers with no clear purpose
- The same charge appearing every month that nobody can explain
- Checks that stay outstanding for months
Quick answers
What is a deposit in transit?
A deposit recorded in your books that hadn’t reached the bank by the statement date. It’s a timing difference and normally clears on the next statement.
What is an outstanding check?
A check you’ve written and recorded that the payee hadn’t cashed by the statement date. It’s a timing difference, but checks outstanding for months should be followed up.
How often should I reconcile?
At least once a month, when the statement arrives. Businesses with many transactions often reconcile weekly.
Want this done for you? BooksBridge reconciles every bank and credit card account for US businesses and CPA firm clients, and explains anything that doesn’t match. See our reconciliation service.
This article is general information, not accounting advice for your business.