Bank Reconciliation Step-by-Step
Bank reconciliation is the monthly ritual of proving that your books and your bank agree, once you account for the handful of transactions that haven't cleared yet. It's the single most reliable way to catch fraud, bank errors, and your own data-entry mistakes before they snowball. Every clean set of books rests on a reconciled bank account. This lesson walks through the process line by line, using real numbers that actually tie out.
Why this skill matters professionally
Employers trust bookkeepers who reconcile cash every single month without being asked. It's the control that catches a forged check, a duplicate vendor payment, or a bank fee nobody authorized. Auditors and lenders look at reconciliation history as a proxy for the overall quality of a company's books — a business that can't reconcile its checking account usually can't be trusted on anything else. In practice, reconciliation is also how bookkeepers find their own errors: a transposed number, a missed deposit, a check entered twice. Catching these monthly, rather than at year-end, keeps financial statements accurate all year and saves hours of cleanup at tax time.
Learning objectives
- Compare bank statement to book balance.
- Identify outstanding checks and deposits in transit.
- Record fees, interest, and errors.
Background concepts
Two balances, one truth
Your books show a cash balance built from every transaction you've entered. The bank shows a balance built from everything it has actually processed. These two numbers are rarely identical on any given day because of timing — some transactions you've recorded haven't hit the bank yet, and vice versa.
Timing differences vs. errors
Reconciliation separates normal timing differences (a check you wrote that hasn't been cashed) from real errors (a bank fee you forgot to record, or a number you fat-fingered). Only errors require correcting entries in your books; timing differences resolve themselves next month.
- Deposits in transit — cash recorded in your books, not yet shown on the statement.
- Outstanding checks — checks you've written and recorded, not yet cashed by the payee.
- Bank-side items you haven't recorded — fees, interest earned, NSF (bounced) checks, automatic charges.
Source documents you need
Pull the bank statement (or online transaction export) for the exact period, your cash ledger or check register, and your prior month's reconciliation report. The prior reconciliation tells you which items were outstanding last time, so you can confirm they cleared.
The reconciliation formula
Adjusted bank balance must equal adjusted book balance. You adjust the bank side for timing differences the bank doesn't know about yet, and you adjust the book side for real transactions you haven't recorded yet.
Bank statement ending balance + Deposits in transit - Outstanding checks +/- Bank errors = Adjusted bank balance Book (cash ledger) ending balance + Interest earned - Bank fees - NSF checks +/- Book errors = Adjusted book balance Adjusted bank balance MUST equal adjusted book balance.
Step-by-step
1. 1. Gather your documents
Collect the bank statement for the period, your cash/checking account ledger from the books, and last month's completed reconciliation (to check off items that were outstanding).
2. 2. Check off matching items
Go line by line: for every transaction on the bank statement, find the matching entry in your books and mark both as cleared. Do the reverse too — for every book entry, look for it on the statement. Anything left unchecked on either side is your reconciling item.
3. 3. List outstanding checks
Checks you've written and recorded in the books that haven't been cashed yet. List them with check number and amount; total them.
4. 4. List deposits in transit
Cash or checks you recorded and deposited (physically or via mobile deposit) before the statement cutoff, but the bank hasn't posted yet — common with end-of-month deposits made after the bank's daily cutoff time.
5. 5. Record bank-side items in your books
Bank fees, monthly service charges, interest earned, and NSF (bounced customer check) charges appear on the statement but usually aren't in your books yet. These need journal entries — they are real transactions, not timing differences.
Bank service fee $35:
Dr Bank Service Charges Expense 35.00
Cr Cash 35.00
Interest earned $12:
Dr Cash 12.00
Cr Interest Income 12.00
Customer check bounced (NSF) $500:
Dr Accounts Receivable 500.00
Cr Cash 500.006. 6. Build the reconciliation
Start with the bank statement ending balance, add deposits in transit, subtract outstanding checks. Separately, start with the book ending balance, add/subtract the items from step 5. The two adjusted totals must match exactly.
ABC Landscaping — Bank Reconciliation, March 31 Bank statement balance, 3/31 $14,860.00 + Deposit in transit (3/31) 900.00 - Outstanding check #1042 (325.00) - Outstanding check #1047 (610.00) Adjusted bank balance $14,825.00 Book (register) balance, 3/31 $14,848.00 + Interest earned 12.00 - Bank service charge (35.00) Adjusted book balance $14,825.00 Match: $14,825.00 = $14,825.00 ✓
7. 7. Post the correcting entries
Book any items you found in step 5 that weren't already in your ledger (fees, interest, NSF). Deposits in transit and outstanding checks need no entry — they're already correctly recorded, just not yet cleared by the bank.
8. 8. Investigate anything that still doesn't tie out
If the two adjusted balances don't match after all known reconciling items, look for: a transposed digit, a duplicate entry, a check written for the wrong amount, or a bank error (rare, but it happens). A $9.00 or $90.00 mismatch is a strong hint of a transposition.
9. 9. File and sign off
Save the completed reconciliation with the bank statement attached. Many companies require a second person (owner, controller) to review and initial it as an internal control.
Real-world workplace examples
Payroll check still outstanding after 90 days
A terminated employee never cashed their final paycheck. After it's been outstanding for the state's unclaimed-property threshold, the company must escheat (remit) the funds to the state rather than keep it as income.
Duplicate vendor payment caught
A bookkeeper noticed the same $2,400 vendor payment appeared twice in the register but only once on the bank statement — a data-entry duplicate, not a bank issue. Reversing the duplicate entry fixed the books without touching cash.
Bank fee for wire transfer
A $25 outgoing wire fee shows on the statement but is easy to miss since it isn't tied to any invoice. Reconciliation is often the only place these small fees get caught and recorded.
Dr Bank Fees Expense 25.00
Cr Cash 25.00Mobile deposit timing
A retail shop deposits Friday's cash via mobile deposit at 6 p.m., after the bank's 5 p.m. cutoff. It posts Monday. Every month-end reconciliation for this business has a recurring deposit-in-transit line for the last day of the month.
Reconciliation reveals check fraud
A check numbered out of sequence and made out to an unfamiliar payee shows up on the statement. The bookkeeper flags it immediately because it doesn't match any entry in the check register — this is exactly the kind of item reconciliation is designed to surface.
Practical scenarios
Case: Riverside Plumbing's April reconciliation
Riverside's book balance on April 30 is $22,140. The bank statement shows $21,560. The bookkeeper finds: check #2011 for $780 still outstanding, a deposit of $1,200 made April 30 that posted May 1, a $40 bank fee not yet recorded, and $20 of interest not yet recorded. Bank side: $21,560 + $1,200 deposit in transit − $780 outstanding check = $21,980. Book side: $22,140 − $40 fee + $20 interest = $22,120. The two don't match ($21,980 vs $22,120, off by $140). The bookkeeper rechecks the register and finds check #2011 was actually written for $920, not $780 — a transposition when it was first entered. Correcting the book entry to $920 changes nothing on the bank side (it's still outstanding at its true amount of $920), but the book balance becomes $22,140 − $140 correction = $22,000. Recomputing: bank side $21,560 + $1,200 − $920 = $21,840; book side $22,000 − $40 + $20 = $21,980. Still off. On closer review, the deposit in transit was actually $1,240, matching a slightly different invoice total. Correcting that: bank side $21,560 + $1,240 − $920 = $21,880; book side stays $21,980. The remaining $100 difference turns out to be a second outstanding check, #2015 for $100, that was omitted from the outstanding list. Adding it: $21,880 − $100 = $21,780... The exercise for the student: rebuild this reconciliation from scratch with corrected figures and confirm both sides land on the same number. This case illustrates the real workflow — reconciliation differences are solved iteratively, one error at a time, not guessed at.
Case: seasonal business with seven outstanding checks
A landscaping company pays subcontractors by check and routinely has 5-8 outstanding at any given month-end because subcontractors are slow to deposit. The bookkeeper keeps a running outstanding-check log rather than rebuilding it from scratch each month: each month, checks that cleared are removed, new ones written are added, and any check outstanding more than 90 days gets a phone call to the payee before considering a stop-payment and reissue.
Common mistakes beginners make
Recording deposits in transit as a journal entry
New bookkeepers sometimes 'fix' a deposit in transit by adjusting the books. Wrong — the books are already correct; only the bank hasn't caught up. No entry is needed; it just shows as a reconciling item until it clears next period.
Forgetting to book bank fees and interest
These are real, unrecorded transactions, easy to overlook because there's no invoice or check for them. Skipping the entries means your books permanently understate expenses and overstate cash by the fee amount.
Reconciling to the wrong statement date
Using a statement that doesn't match your book period (e.g., a mid-month bank cutoff vs. calendar month-end books) makes reconciliation impossible to complete cleanly. Always reconcile to the same cutoff date used in your books.
Plugging the difference instead of finding it
Forcing the reconciliation to balance with a 'miscellaneous adjustment' entry hides real errors and can mask fraud. Every difference should be traced to a specific transaction.
Not reconciling every month
Skipping a month lets errors compound and makes the eventual reconciliation much harder, since there are twice as many transactions to sift through and twice as much time for the responsible person to forget the details.
Best practices
- Reconcile every bank and credit card account monthly, without exception.
- Reconcile as soon as the statement is available, not weeks later.
- Keep a running outstanding-check log rather than rebuilding it from scratch each month.
- Investigate every unmatched item until it's fully explained — never plug a difference.
- Have a second person review and sign off on completed reconciliations.
- Attach the bank statement and reconciliation report together in your files.
- Follow up on checks outstanding more than 60-90 days; consider stop-payment and reissue.
- Reconcile petty cash and merchant/payment-processor accounts with the same discipline.
Professional tips
- A difference that's evenly divisible by 9 almost always means a transposed digit somewhere.
- Sort your outstanding-check list by check number, not amount — it makes it far easier to spot gaps.
- Set up bank feeds in your accounting software, but never trust the auto-match blindly; spot-check it.
- Reconcile credit cards the same way you reconcile bank accounts — they're just as prone to unrecorded fees and duplicate charges.
- If a check has been outstanding for 6+ months, check your state's unclaimed-property rules before writing it off to income.
- Keep a locked prior-period reconciliation; if it changes, someone edited a cleared transaction, which should never happen.
Practice exercises
Build a reconciliation from raw numbers
Bank statement balance: $9,420. Book balance: $9,180. Outstanding checks: #501 $200, #503 $150. Deposit in transit: $300. Bank fee not yet recorded: $30. Interest not yet recorded: $10. Build the two-sided reconciliation and confirm it balances.
Answer: Bank: 9,420 + 300 - 200 - 150 = 9,370 Books: 9,180 - 30 + 10 = 9,160 Difference of 210 remains — find and correct the error before submitting.
Journal entries from a reconciliation
Write the journal entries for: a $45 monthly service fee, $18 of interest earned, and a customer's $350 check that bounced (NSF).
Outstanding check aging
Given a list of 8 outstanding checks with dates ranging from 5 to 140 days old, sort them by age and identify which ones warrant a follow-up call to the payee.
Review questions
Why won't your book balance ever exactly equal the bank's balance on any random day?
Because of timing — checks you've written haven't all cleared, and deposits you've made haven't all posted, even though both sides are individually correct.
What's the difference between a timing difference and an error?
A timing difference resolves itself when the transaction eventually clears the bank; an error requires a correcting journal entry because a real, unrecorded transaction happened (like a fee) or something was recorded wrong.
Why do you record bank fees and interest as journal entries but not deposits in transit?
Fees and interest are transactions you haven't recorded at all yet — they need to enter the books. Deposits in transit are already correctly recorded; only the bank hasn't caught up.
What should you do if a check has been outstanding for four months?
Contact the payee to confirm they still have it; if not, consider a stop-payment and reissue, and check state unclaimed-property rules before writing it off.
What does a reconciliation difference divisible by 9 usually indicate?
A transposed digit somewhere in the entries — a classic bookkeeping tell.
Key takeaways
- Reconciliation proves the bank and the books agree after accounting for timing.
- Only real, unrecorded transactions (fees, interest, NSF checks) need journal entries.
- Deposits in transit and outstanding checks are already correct in the books — no entry needed.
- Never plug a difference; trace every discrepancy to its source.
- Reconcile monthly, without exception, for every cash and credit account.
- Old outstanding checks need follow-up and may trigger unclaimed-property rules.
- A second reviewer signing off adds a critical layer of fraud control.
Frequently asked questions
Do I need to reconcile credit card accounts too?
Yes — treat them exactly like a bank account, matching charges and payments and booking any unrecorded fees.
What if the bank made an actual error?
It's rare but happens; document it, contact the bank, and don't adjust your books to match their error — adjust the bank side of the reconciliation until they correct it.
Can accounting software do this automatically?
Software can auto-match many transactions via bank feeds, but a human still needs to review unmatched items and investigate discrepancies.
What if I find an error from three months ago?
Correct it in the current period with a clear explanation, and note it in your files; avoid altering closed prior periods unless your firm's policy allows reopening them.
How long should I keep completed reconciliations?
Most businesses keep them at least 3-7 years, matching general recordkeeping and tax retention guidance, which varies by jurisdiction.
What's a compensating error?
Two separate errors that happen to cancel each other out, making the reconciliation appear to balance even though it's wrong — a good reason to still review reconciling items individually.
Related lessons
18 min • Beginner
15 min • Intermediate
15 min • Beginner
15 min • Intermediate