Definition
A bank reconciliation compares the cash balance in the general ledger with the balance on the bank statement at the same date and explains every difference. Typical reconciling items are payments not yet cleared, deposits in transit, bank fees and interest not yet recorded, and errors. It is one of the most important month-end controls.
How it works
Differences fall into two groups. Timing items (outstanding payments, deposits in transit) are already in the books and will appear on the bank statement soon, so no entry is needed. Book adjustments (bank charges, interest received, direct debits, returned customer payments) are on the statement but not yet in the books, so they must be recorded.
A reconciliation is complete when the adjusted book balance equals the adjusted bank balance. Reconcile every account every month, investigate old unreconciled items and keep the signed reconciliation as evidence. Add it to your month-end close checklist and set a lock date once it is done.
Example: reconciling a business current account
At 31 March the ledger shows 18,950 and the bank statement shows 20,300. A supplier payment of 2,000 has not cleared, a customer deposit of 400 is in transit, and bank fees of 35 and a software direct debit of 215 are not yet in the books. After the books record the 250 of charges, both sides agree at 18,700.
| Bank side | Amount | Book side | Amount |
|---|---|---|---|
| Balance per bank statement | 20,300 | Balance per ledger | 18,950 |
| Less outstanding payment | (2,000) | Less bank fees | (35) |
| Add deposit in transit | 400 | Less direct debit | (215) |
| Adjusted bank balance | 18,700 | Adjusted book balance | 18,700 |