How to Reconcile a Bank Statement Step-by-Step

Bank reconciliation involves comparing your financial records with those of your bank. This process helps ensure the accuracy of your personal or business accounts by identifying differences between your internal ledger and the bank’s statement. Its purpose is to confirm that cash transactions recorded in your books align with those processed by your financial institution. Regularly performing bank reconciliation helps maintain financial health, allowing for the detection of errors, omissions, or potential fraudulent activities.

Gathering Your Information

Before beginning the reconciliation process, gather all necessary documents for the period you intend to review. You will need your most recent bank statement, which outlines all transactions processed by your bank, typically a month. This statement provides starting and ending balances, along with a detailed list of deposits, withdrawals, and other transactions.

Alongside your bank statement, you will need your personal or business cash ledger, checkbook register, or transaction records from your accounting software for the same period. For each document, focus on key details such as transaction dates, amounts, check numbers, and payee or payer information. Ensuring these records are complete and accessible is important for a thorough comparison.

Matching Transactions

With your bank statement and internal financial records prepared, systematically compare each transaction. Begin by going through your bank statement line by line, identifying each entry and locating its corresponding record in your ledger or accounting software. This includes all deposits, checks cleared, debit card purchases, ATM withdrawals, and electronic transfers.

As you find a match, mark or check off the item on both your bank statement and your internal records. This approach helps you keep track of verified transactions. For instance, if you wrote check number 123, confirm the same check number and amount appear as a cleared transaction on your bank statement. Similarly, verify every deposit you recorded in your ledger is reflected on the bank statement.

Adjusting Balances

After matching all clear transactions, you will likely find items that appear on one record but not the other, necessitating adjustments to both the bank and book balances. These timing differences are common. For instance, “deposits in transit” are funds you have deposited but the bank has not yet processed; these should be added to the bank’s ending balance. Similarly, “outstanding checks” are checks you have written and recorded but have not yet cleared the bank; these amounts must be subtracted from the bank’s ending balance.

Conversely, certain items on your bank statement may not yet be in your internal records. Bank service charges, such as monthly maintenance fees or ATM fees, are deducted directly by the bank and must be subtracted from your book’s ending balance. Interest earned on your account, though often a small amount, needs to be added to your book balance. Additionally, direct debits or credits (like automatic bill payments or direct deposits) and Non-Sufficient Funds (NSF) checks require corresponding adjustments to your book balance. The objective of these adjustments is to arrive at a point where the adjusted bank balance equals the adjusted book balance.

Resolving Discrepancies

If, after making all necessary adjustments for timing differences, your adjusted bank balance and adjusted book balance still do not match, a discrepancy exists that requires further investigation. Common reasons for these remaining differences include errors in recording amounts, such as transposition errors where digits are accidentally swapped, or incorrect entries in either your records or the bank’s (though bank errors are less frequent). Unrecorded transactions, duplicate entries, or mathematical errors made during the reconciliation process itself can also be contributing factors.

To find the root cause, begin by meticulously double-checking all additions and subtractions performed during the reconciliation. Next, carefully review all unmarked items from both your bank statement and your internal records to ensure nothing was overlooked during the initial matching phase. If the discrepancy persists, it may be necessary to re-compare all transactions from scratch, paying close attention to dates and amounts. Additionally, examine the previous month’s reconciliation for any uncorrected errors that might have carried over. Patience and persistence are important when identifying and correcting these remaining differences, as a thorough review is necessary to achieve full reconciliation.