What is bank reconciliation? 

Your bank account records all transactions with suppliers, customers, and financing partners, serving as the primary source of truth.  

At the same time, your accounting system tracks these same movements as the basis for financial statements and cash flow management.  

However, due to external schedules and potential errors, your records and the bank’s may differ. Bank reconciliation is how you make sure both sets of information align.  

Bank reconciliation is the process of comparing each bank statement with your own financial records. Then you can reconcile any differences in reporting between the bank and your own books. 

Typically, adjustments need to be made and noted on the company’s end to account for the differences in the records, like bank service charges or fees that the company hasn’t yet recorded.  

While some companies still perform this manually, many use integrated accounting software to automate much of the process. 

Here’s what we cover:

What is the purpose of a bank reconciliation?

The primary purpose of a bank reconciliation is to ensure accurate financial reporting.

By identifying and resolving discrepancies, the corrected cash balance provides a reliable figure that reflects your company’s true cash position in its financial statements. 

Secondly, regular reconciliation acts as a key control in preventing fraud. By carefully comparing records you can spot unusual or suspicious transactions, and then take action to safeguard your cash assets. 

Types of bank reconciliation

Your approach to bank reconciliation depends on the volume of your transactions and the complexity of your cash management needs. This means you need to be aware of the different methods. Here are the main types: 

• Periodic reconciliation: this is the most common type. It involves reconciling bank statements at regular intervals, typically monthly, after receiving each bank statement. For example, a small business might receive its bank statement at the end of April and then perform a reconciliation in early May, comparing it to their cash records for April. 

• Continuous reconciliation: this method involves reconciling transactions more frequently, such as daily or weekly. This allows for quicker identification of discrepancies. For instance, a larger company with high transaction volumes might reconcile its cash account every Friday, comparing its records to the bank’s online transaction history up to that point. 

• Inter-company reconciliation: this is necessary when a company has multiple bank accounts, often across different entities or subsidiaries. It involves reconciling transactions between these different accounts. For example, if a parent company transfers funds to a subsidiary’s bank account, both accounts need to reflect this transaction, and an inter-company reconciliation ensures they match. 

• Accounts receivable reconciliation: the cash receipts recorded in your accounting system don’t always match the deposits shown on the bank statement. Any discrepancies, like a customer payment recorded internally but not yet showing on the bank statement (deposit in transit), would need to be investigated. 

• Accounts payable reconciliation: all payments made to suppliers and other creditors should also show up as cleared in your bank account. So here you’ll compare your list of issued checks and electronic payments with the debits in your bank statement. Differences might arise from outstanding checks that have been issued but not yet cashed by the recipient. 

What is a bank reconciliation statement?

A bank reconciliation statement is a record of each reconciliation you perform, whether that be monthly, weekly, or daily. It lists the items that caused any differences between the bank statement and your internal records and how the differences have been corrected.

In short, it shows that both cash balances are now in agreement. 

The statement is primarily for internal use by the company’s accounting team and management to ensure accuracy and detect any issues. It may also be reviewed by auditors to ensure compliance and financial accuracy.  

How often should you do bank reconciliations?

Your decision on how often to perform bank reconciliations depends on your business’s specific needs and transaction volume.  

For businesses with simpler accounting and fewer transactions, reconciling monthly—after receiving each bank statement—may suffice.

However, as your business grows, possibly generating a higher volume of transactions, you may find it advisable to conduct them weekly or even daily.  

More frequent reconciliation improves cash flow management, helps you identify discrepancies promptly, and allows ample time to correct errors before they lead to accounting complications. 

Whatever the case, it’s important for the frequency to be consistent. Here are some reasons why regular bank reconciliation is beneficial:  

• Improved cash flow management: by identifying discrepancies and ensuring accurate cash balances, businesses gain a clearer understanding of their available funds. This allows for better planning of expenditures, timely payments, and informed decisions about investments. 

• Early detection of fraudulent activities: routine comparisons between internal records and bank statements can uncover suspicious activities like forged checks or false electronic transfers before they lead to significant losses. 

• Enhanced error correction: reconciliations also catch unintentional mistakes made by either the bank or your company. Correcting these promptly ensures the reliability of your financial data and strengthens your relationship with the bank. 

How to do a bank reconciliation in 5 steps

To get the most out of this process, it helps to follow a structured approach. There are five basic steps to follow when you prepare a bank reconciliation: 

1. Match transactions between internal records and bank statements 

Begin by comparing the transactions recorded in your company’s cash ledger with those listed on the bank statement. Focus first on matching transaction amounts rather than descriptions, which can sometimes vary in wording. Ensure that all deposits, withdrawals, and other credits or debits are accounted for in both records. 

2. Identify and note discrepancies 

As you go through the comparison, highlight any mismatches or missing items. Common discrepancies include outstanding checks (issued but not yet cleared), deposits in transit (received but not yet recorded by the bank), unrecorded bank fees, and potential errors on either side. 

3. Update your records 

Adjust your internal ledger to reflect any bank-side items not yet recorded, such as interest income or service charges. Also, correct any errors you find in your books. This step ensures your internal records reflect the actual cash position. 

4. Keep a record of all changes made

Register the date of the adjustment, the amount, the specific account affected, and a clear explanation of why the adjustment was necessary. You may also need to reference supporting documentation.

Your accounting system should include space for explanatory journal entries to document these adjustments. The bank reconciliation statement itself serves as a record of the adjustments made and can be referenced during audits. 

5. Reconcile the final balances 

After making all necessary adjustments, check that the revised balance in your company’s records matches the adjusted balance on the bank statement (which should account for timing differences like outstanding checks). If the balances align, your reconciliation is complete. 

Bank reconciliation template

For consistency, always use a standardized format for organizing your bank reconciliation process. It’s recommended to use a preconfigured template. This helps ensure all necessary steps are followed and that all reconciling items are properly documented.  

The template should look like this: 

Bank statement
Date:	Transaction:	Movement:
	Sale 1	$+
	Investment dividend	$+
	Supplier payment 1	$+
	Bills	$-
	Fees	$-
End date:	Closing balance:	$ xxxx
Internal records
	Sale 1	$+
	Sale 2	$+
	Investment dividend	$+
	Supplier payment 1	$+
	Supplier payment 2	$+
	Bills	$-
End date:	Closing balance:	$ xxxx
Adjustments
Sale 2: check outstanding–add to bank account
Supplier payment 2: deposit in transit–add to bank account		New bank balance: $$
Bank fees–subtract from internal books		New internal balance: $$

Bank reconciliation example

Taking three classic types of discrepancies that can arise between the bank’s information and your records, let’s build a simple case study to show how the registries can be corrected.

Now, look at outstanding checks, deposits in transit and bank service charges. 

Example of a typical bank reconciliation statement

Initial bank statement = $6,450 

Initial company books = $5,000 

Adjustments to be noted: 

• $2,000 in outstanding checks to suppliers 

• $500 in deposits in transit from sales 

• $50 in bank service charges 

First, factor in the information missing from the bank statement and adjust it. That means the outstanding checks and deposits in transit: 

• $6,450 – $2,000 + $500 = $4,950 

Then adjust your books to reflect the service charges from the bank that you didn’t know about until you got the statement: 

• $5,000 – $50 = $4,950 

Adjusted bank statement = $4,950 

Adjusted company books = $4,950 

The two balances are now the same and therefore are reconciled. 

Using the template it looks like this: 

Bank statement
Date:	Transaction:	Movement:
	Initial balance	$6,450
	Adjustment: outstanding checks	($2,000)
	Adjustment: deposit in transit	$500
End date:	Closing balance:	$4,950
Internal records
	Initial balance	$5,000
	Adjustment: bank fees	($50)
End date:	Closing balance:	$4,950

Bank reconciliation as a learning opportunity

Every reconciliation is a chance to spot patterns and learn. You might notice recurring errors—like duplicated transactions, missing entries, or timing differences.  

These clues help you tighten your processes and catch issues earlier next time. Over time, reconciliation helps you prevent future discrepancies by making your bookkeeping more accurate and your internal checks more effective.  

This doesn’t just fix mistakes—it’s shows you why they happen and helps you to stops them before they start. 

Software for bank reconciliation

While manual bank reconciliation offers control and can be cheaper for very small businesses, it means you have to compare transactions line by line. It’s time-consuming and tedious process that is prone to errors.  

Automated bank reconciliation, for example, like software from Sage, saves time and enhances accuracy, while also integrating with your accounting systems. It provides real-time visibility and helps detect or prevent fraud.  

While purpose-built bank reconciliation software comes at a cost, it pays for itself through the added efficiency it enables, particularly if your business manages high transaction volumes, or multiple accounts and currencies.

There’s fewer mistakes and less re-work needed, and automation can save you much more time. 

Final thoughts

Bank reconciliation is a fundamental control for any business that manages cash, but has to be done consistently to safeguard against errors and ensure accuracy. 

While the process can present complexities, establishing a regular schedule and meticulous attention to detail are key.

Investing in the right accounting solution can make your reconciliations faster, more accurate, and less labor-intensive—while still delivering the key benefits of reliable financial reporting and early fraud detection. 

By understanding the different types of reconciliation and following a structured approach, you can take control of cash flow and keep your business on an even keel. 

Bank reconciliation FAQs

1. Who is responsible for conducting your bank reconciliations?

The responsibility for bank reconciliations typically falls within the accounting department. In smaller businesses, it might be the business owner or a dedicated bookkeeper. Larger organizations often have accounting clerks or specialists assigned to this crucial task, sometimes with oversight from a controller or accounting manager. Segregation of duties is a good practice, meaning the person handling cash receipts and disbursements shouldn’t be the one performing the reconciliation. 

2. Is the bank reconciliation statement considered a ledger?

No, the bank reconciliation statement is not a ledger. A ledger is a primary book of accounts that records financial transactions. The bank reconciliation statement is a separate document, a schedule, or a report that compares the cash balance in the company’s ledger to the balance reported by the bank. It identifies the differences between these two balances and shows how the balances should be adjusted so they agree.   

3. When should reconciling items be addressed?

Reconciling items should be addressed promptly. Temporary timing differences, like outstanding checks or deposits in transit, will naturally clear over time. However, errors identified in either your records or the bank’s, as well as any suspicious items, should be investigated and corrected immediately. That is the best way to maintain accurate records and prevent potential issues from escalating.