How to Perform a Bank Reconciliation Step-by-Step

Bank reconciliation compares your internal cash records with your bank statement to ensure both are accurate. It aligns the cash balance in your accounting records with the balance on your bank statement. The primary purpose of this reconciliation is to identify and resolve any differences, providing a precise picture of your actual cash position. Regular bank reconciliations are a valuable internal control mechanism, helping to detect errors in recording transactions, identify unauthorized activity, and prevent fraud. This process supports sound financial management and helps maintain the integrity of your financial data.

Gathering Your Financial Records

Before beginning, gather all necessary financial records for the specific period. This ensures you have comprehensive data. The two primary documents required are your bank statement and your internal cash records, which could be a cash ledger, a checkbook register, or the cash account within your accounting software.

Your bank statement is an official document from your financial institution detailing all transactions that have affected your account over a defined period, typically a month. It will show the beginning balance, all deposits, withdrawals, electronic transfers, checks paid, bank fees, and any interest earned, culminating in an ending balance. Your internal cash records, on the other hand, reflect all cash inflows and outflows as recorded by you or your business. For each transaction, these records should include the date, description, amount, and whether it was a deposit or a withdrawal. Confirming that both your bank statement and your internal records cover the exact same period is important to ensure an accurate comparison.

Performing the Reconciliation Steps

Once records are gathered, begin systematically matching entries between your internal records and the bank statement. This ensures every transaction is accounted for. Visually mark off each item as it is matched.

Start by comparing all deposits listed in your internal records with those appearing on the bank statement. For each deposit, verify the date and the amount. If a deposit is present in your records but not on the bank statement, it is likely a “deposit in transit”—funds you have recorded but the bank has not yet processed, often due to timing differences such as deposits made after banking hours or on weekends.

Next, proceed to compare all withdrawals and payments. This includes matching checks you have written, electronic funds transfers (EFTs), debit card transactions, and any automated payments. For checks, confirm the check number, date, and amount. If a check has been issued from your records but has not yet appeared on the bank statement, it is an “outstanding check”—a payment you have made that has not yet cleared the bank. Mark each matched item on both your internal records and the bank statement to clearly distinguish cleared transactions from those that still need investigation.

Investigating and Correcting Discrepancies

After comparing all transactions, any unmatched items are discrepancies that require investigation and adjustment. These differences fall into several categories, each requiring a specific action. The goal is for the adjusted balance in your internal records to align with the adjusted bank balance.

One common type of discrepancy involves timing differences, such as outstanding checks and deposits in transit. Outstanding checks are subtracted from the bank statement balance because they reduce the actual cash available, even if the bank hasn’t processed them yet. Conversely, deposits in transit are added to the bank statement balance, as these funds are already in your possession and recorded in your books, awaiting bank processing. Another category includes transactions on the bank statement not yet in your internal records, such as bank service charges or interest earned. These items necessitate adjustments to your internal records to accurately reflect the bank’s charges or credits.

Errors can also cause discrepancies, originating either from your bank or within your own records. If the bank has made an error, such as an incorrect charge or a deposit to the wrong account, you will need to contact the bank to initiate a correction. Errors in your own records, such as transposing numbers, recording a transaction twice, or simply omitting an entry, require direct correction in your cash ledger or accounting software. For a business, these corrections often involve making journal entries to adjust the cash account, ensuring that the final adjusted balance in your books matches the reconciled bank balance. For individuals, this may involve simply updating the checkbook register.