How to Reconcile Bank Accounts: A Step-by-Step Process

Bank reconciliation aligns an individual’s or business’s cash records with their bank statement. This process identifies and explains differences between the two balances, ensuring financial accuracy. It helps confirm all cash transactions are properly recorded, which supports sound financial management and cash flow visibility.

Reconciliation prevents financial misstatements and aids in detecting potential fraud or unauthorized transactions early. It provides a clear picture of available cash, supporting informed financial decisions. Regular reconciliation, often performed monthly, strengthens internal controls and contributes to smoother tax preparation and audit readiness.

Preparing for Reconciliation

Before starting bank reconciliation, gather specific financial documents for comparison. The monthly bank statement is essential, outlining all transactions processed by the bank for a specific period. It provides the ending balance, details of deposits, withdrawals, electronic transfers, and any bank charges or credits.

You will also need your internal cash ledger or checkbook register, your own record of all cash inflows and outflows. This ledger should document every check issued, deposit made, and other cash transactions. Comparing these two records helps identify matching and unmatched items.

Having the prior period’s bank reconciliation is helpful, as it lists outstanding items from the previous month that may have cleared. For instance, a check written late in the prior month might appear on the current bank statement.

Step-by-Step Bank Reconciliation Process

With all necessary documents prepared, the bank reconciliation process begins by comparing transactions on your bank statement against those in your internal cash ledger. Start by matching deposits recorded in your ledger with those appearing on the bank statement. Deposits recorded in your books but not yet on the bank statement are “deposits in transit.”

Next, compare all withdrawals, including checks, debit card transactions, and electronic debits, from your ledger to the bank statement. Checks written and recorded in your ledger but not yet cleared by the bank are “outstanding checks.” These timing differences are common and must be accounted for in the reconciliation.

Identify transactions that appear on the bank statement but are not yet recorded in your internal ledger. These often include bank service charges or interest earned on the account. These items need to be added to your ledger.

Finally, adjust both the bank balance and your book balance to arrive at a reconciled figure. To the bank statement balance, add any deposits in transit and deduct any outstanding checks. For your internal ledger balance, add any interest earned and deduct bank charges or other items that appeared on the bank statement but were not yet recorded in your books. The goal is for both adjusted balances to match, indicating a successful reconciliation.

Resolving Discrepancies

When the adjusted bank balance and the adjusted book balance do not match, or when specific unmatched items are identified, resolving these discrepancies becomes the next step. One common type of difference arises from outstanding checks, which are payments you have issued and recorded but the bank has not yet processed. These checks reduce your book balance but not the bank’s balance until they clear, creating a temporary mismatch.

Similarly, deposits in transit occur when you have recorded a deposit, but the bank has not yet credited it to your account. This typically happens with deposits made late in the month or mailed deposits, where there is a delay before they appear on the bank statement. These timing differences require no immediate action other than noting them, as they will naturally resolve in the next accounting period.

Errors can also contribute to discrepancies, stemming from either the bank or your own records. Bank errors, such as incorrectly posting a transaction to your account or omitting an entry, require direct communication with the bank to rectify. You should provide detailed information, including transaction dates and amounts, and retain documentation of your communication.

Mistakes made in your internal ledger, such as incorrect amounts, transposed numbers, or missed entries, also need correction. For example, if you recorded a $100 payment as $10, an adjusting entry in your ledger is required to correct the cash balance. Resolving these discrepancies ensures the accuracy of your financial records and provides a reliable basis for future financial reporting and decision-making.