Money Matters

Bank reconciliation: What it is, how to do it, and examples

Bank reconciliation keeps your financial records accurate, your cash position reliable, and your business protected against errors and fraud. Here’s everything you need to know.

Published August 28, 202616 min read Share

This article was originally published on May 9, 2025 but has been refreshed and re-published with new content in August 2026.

Your bank account records every transaction your business makes with customers, suppliers, and financing partners, and your accounting system records those same transactions to support financial reporting and cash flow management.

But because of timing differences, processing delays, and occasional errors, these two records don’t always align.

Bank reconciliation is how you make sure your transactions add up.

Find out everything you need to know about bank reconciliation, including why it matters, the different methods, how to reconcile your accounts step by step, and ways to streamline the process for your business. 

Key takeaways

• Bank reconciliation is the process of comparing your bank statement with your internal financial records to ensure they match.
• Regular reconciliation helps you maintain accurate cash flow reporting, detect errors early, and identify potentially fraudulent transactions.
• The most common causes of discrepancies are outstanding checks, deposits in transit, bank fees, and timing differences.
• There are several types of bank reconciliation, including periodic, continuous, and inter-company, each suited to different business needs.
• Accounting software can automate much of the process, reducing manual effort and improving accuracy.

Here’s what we cover:

What is a bank reconciliation?

Bank reconciliation is the process of comparing your business bank statement with your own financial records to identify and resolve any discrepancies, so that both sets of records show the same cash balance.

Your bank account records every financial transaction your business makes, including those with:

• Suppliers and vendors.
• Customers and clients.
• Financing partners and lenders.
• Banking institutions themselves, such as interest payments and service fees.

Together, these transactions make your bank statement the primary source of truth for your cash position.

Your accounting system tracks the same movements as the basis for financial statements and cash flow management, but the two don’t always tell the same story at the same time.

Here’s why discrepancies commonly arise:

Why records differ	Explanatio
Outstanding checks	Payments recorded in your books but not yet cleared by the bank.
Deposits in transit	Deposits recorded in your books but not yet reflected on your bank statement.
Bank fees and interest	Transactions recorded by the bank before they’re entered into your accounting records.
Recording errors	Mistakes in either your books or the bank’s records that create mismatched balances.
Unauthorized transactions	Unexpected or fraudulent activity that must be investigated and corrected.

Because of these timing differences and potential errors, your records and the bank’s records may differ at any given point.

Adjustments typically need to be made on the company’s end, like recording bank service charges that weren’t previously captured internally.

While some businesses still perform bank reconciliation manually, many use integrated accounting software to automate much of the process, which helps in reducing errors and saving significant time.

Types of bank reconciliation

There are several types of bank reconciliation, each suited to different business sizes, transaction volumes, and cash management needs. Understanding which approach fits your business helps you build a more consistent and effective reconciliation process.

The different types of bank reconciliation are:

Periodic bank reconciliation

Periodic reconciliation is the most common approach to bank reconciliation. It involves comparing your accounting records with your bank statement at regular intervals, typically once a month after each statement is issued.

For example, a small business might receive its April bank statement at the beginning of May and reconcile it against its cash records for April.

Continuous bank reconciliation

Continuous reconciliation involves reviewing and matching transactions more frequently, such as daily or weekly, instead of waiting until the end of the month. This approach helps identify discrepancies sooner and is often used by organizations with high transaction volumes.

For example, a large business might reconcile its cash account every Friday using its bank’s online transaction history.

Inter-company bank reconciliation

Inter-company reconciliation is used by businesses with multiple entities or bank accounts to ensure transactions between them are recorded accurately.

For example, if a parent company transfers funds to a subsidiary, both organizations should record the transaction consistently so their financial records remain aligned.

Accounts receivable reconciliation

Accounts receivable reconciliation compares customer payments recorded in your accounting system with deposits shown on your bank statement.

This helps identify timing differences and discrepancies, such as deposits in transit that have been recorded internally but have not yet appeared in the bank account.

Accounts payable reconciliation

Accounts payable reconciliation verifies that payments made to suppliers and other creditors have cleared your bank account and match your accounting records.

Differences often occur because of outstanding checks or electronic payments that have been recorded but have not yet been processed by the bank.

What is a bank reconciliation statement?

A bank reconciliation statement is a formal record of each reconciliation you perform, whether monthly, weekly, or daily. It lists every item that caused a discrepancy between your bank statement and your internal records, and documents how each difference was resolved.

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

The statement is primarily for internal use by your accounting team and management, though it may also be reviewed by auditors to verify compliance and financial accuracy.

A bank reconciliation statement is not a ledger. A ledger is a primary book of accounts that records financial transactions.

The reconciliation statement is a separate document (often a schedule or report) that bridges the gap between your bank records and your internal accounts.  

How often should you do bank reconciliations?

How often you should perform bank reconciliations depends on your business size and transaction volume. Monthly reconciliation suits smaller businesses with fewer transactions, while weekly or daily reconciliation is advisable as your business grows and transaction complexity increases.

Whatever frequency you choose, consistency is the most important factor.

Here are the core benefits of reconciling regularly:

• Improved cash flow management: accurate cash balances give you a clearer picture of available funds, supporting better planning of expenditures, timely payments, and informed investment decisions. Effective cash flow management depends on knowing your true cash position at all times.
• Early fraud detection: routine comparisons between internal records and bank statements can uncover suspicious activity such as forged checks or unauthorized electronic transfers before they lead to significant losses.
• Enhanced error correction: reconciliation catches unintentional mistakes made by either the bank or your own team. Correcting these promptly ensures the reliability of your financial data.

How to do a bank reconciliation in five steps

Bank reconciliation follows a consistent five-step process: match transactions between your internal records and bank statement, identify discrepancies, update your records, document all changes, and confirm the final balances agree.

To get the most out of this process, a structured approach is essential. Here’s how to prepare a bank reconciliation:

Step 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 decriptions, which can sometimes vary in wording. Check that the following appear in both records:

• Deposits
• Withdrawals
• Electronic transfers
• Bank fees and interest
• Other credits and debits

Step 2: Identify and note discrepancies

As you compare the records, highlight any mismatches or missing transactions. Common discrepancies include:

• Outstanding checks
• Deposits in transit
• Unrecorded bank fees or interest
• Duplicate or missing entries
• Errors in either your records or the bank statement

Step 3: Update your records

Once you’ve identified any differences, update your internal ledger to reflect bank-side transactions that haven’t yet been recorded and correct any bookkeeping errors.

This may include:

• Recording bank fees
• Recording interest earned
• Correcting data entry mistakes
• Adjusting duplicate or missing transactions

If you’ve double-checked your records and believe a discrepancy is due to an error on the bank’s statement, contact your bank before making adjustments to your books.

Keep supporting documentation, such as receipts or payment confirmations, so you can help the bank investigate and correct the issue if necessary.

Using integrated accounting software can reduce manual errors and make this process faster and more accurate.

Step 4: Keep a record of all changes made

Document every adjustment so you have a clear audit trail. For each change, record:

• The adjustment date
• The amount
• The account affected
• The reason for the adjustment

Your accounting system should allow you to add explanatory journal entries, while the completed bank reconciliation statement serves as supporting documentation for future audits.

Step 5: Reconcile the final balances

After making all necessary adjustments, compare your revised cash balance with the adjusted balance on the bank statement, taking timing differences into account.

Before considering the reconciliation complete, confirm that:

• Outstanding checks have been accounted for
• Deposits in transit have been included
• All adjustments have been recorded
• Both adjusted balances match

If the balances still don’t align, repeat the comparison process to identify any remaining discrepancies. 

Understanding key bank reconciliation terminology

Understanding common bank reconciliation terms makes it easier to identify discrepancies, interpret your bank statement, and communicate with accountants, auditors, and banking partners.

The key balances used in bank reconciliation

These are the primary balances you’ll compare throughout the reconciliation process.

Term	What it means
Book balance	The cash balance recorded in your company’s general ledger before reconciliation adjustments are made
Bank balance	The cash balance shown on your bank statement for a specific date. It may differ from your book balance because some transactions haven’t yet cleared.
Adjusted cash balance	The final reconciled cash balance after accounting for outstanding checks, deposits in transit, bank fees, interest, and corrections. Once reconciliation is complete, the adjusted balances should match.

Common timing differences that affect bank reconciliation

Not every discrepancy indicates a problem. Some differences occur because transactions are recorded at different times by your business and your bank.

Term	What it means
Outstanding check	A check your business has issued that hasn’t yet been presented to or cleared by the bank.
Deposit in transit	A payment your business has recorded but that hasn’t yet been processed and reflected in your bank account, often because it was deposited near the end of the business day.
Uncleared transaction	Any transaction recorded in your books that the bank hasn’t yet processed, including outstanding checks and deposits in transit.

Common bank reconciliation errors and exceptions

Some discrepancies require investigation because they result from mistakes or failed transactions rather than normal timing differences.

Term	What it means
NSF check	A check returned because the issuer’s account contained insufficient funds. The payment is reversed, and one or both parties may incur fees.
Bank error	A mistake made by the bank, such as processing an incorrect transaction amount or posting a transaction to the wrong account. These errors should be reported so they can be corrected.

Related accounting terms to know

Bank reconciliation is one part of maintaining accurate financial records. These related concepts help put the process into context.

Term	What it means
Cleared transaction	A transaction that has been fully processed by the bank and appears in both your accounting records and your bank statement.
General ledger reconciliation	The broader process of verifying that all accounts in your general ledger are complete and accurate. Bank reconciliation is one component of that process.

These terms provide the foundation for understanding how bank reconciliation works in practice.

Whether you’re reviewing timing differences, correcting errors, or verifying final balances, knowing the terminology helps you identify issues faster and maintain more accurate financial records.

Bank reconciliation example

Here is a worked example of a bank reconciliation for a fictional small business called Blue Ridge Bakery, showing how to identify discrepancies, make adjustments, and arrive at a reconciled cash balance.

Blue Ridge Bakery is reconciling its checking account for the month of March. The bank statement shows a closing balance of $14,200, but the company’s internal books show $12,850.

The accountant needs to determine why the two figures differ before making any adjustments.

Step 1: Compare records and identify discrepancies

The accountant compares each transaction in the bank statement against the company’s cash records, looking for items that appear in one record but not the other.

After reviewing both sets of records, three discrepancies are identified:

Item	Type	Amount	Where it appears
Outstanding check to flour supplier	Outstanding check	$1,200	Books only
Customer payment not yet cleared	Deposit in transit	$800	Books only
Monthly bank service charge	Bank fee	$50	Bank statement only
Interest income	Bank credit	$1000	Bank statement only

These differences fall into two categories:

• Timing differences: transactions recorded by the business but not yet processed by the bank, such as outstanding checks and deposits in transit.
• Book adjustments: transactions processed by the bank that haven’t yet been recorded internally, such as bank fees or interest income.

Once each discrepancy has been identified and categorized, the accountant can adjust the bank balance and book balance separately.

Step 2: Adjust the bank balance

The accountant first adjusts the bank statement balance for transactions recorded in the company’s books that have not yet cleared the bank.

Bank balance adjustment	Amount
Bank statement balance	$14,200
Add: Deposit in transit	+$800
Less: Outstanding check	-$1,200
Adjusted bank balance	$13,800

The deposit in transit is added because it has been recorded by Blue Ridge Bakery but has not yet appeared on the bank statement.

The outstanding check is deducted because it has been recorded by the company but has not yet been processed by the bank.

Step 3: Adjust the book balance

Next, the accountant adjusts the company’s internal records for transactions that appear on the bank statement but have not yet been recorded in the books.

Book balance adjustment	Amount
Book balance	$12,850
Add: Interest income	+$1,000
Less: Bank service charge	-$50
Adjusted book balance	$13,800

The interest income is added because the bank recorded it before the company entered it into its books.

The bank service charge is deducted because it reduced the account balance but had not yet been recorded internally.

Both adjusted balances now match at $13,800, confirming that the reconciliation is complete.

What does this tell us?

The original $1,350 difference between the bank statement and the company’s books was fully explained by timing differences and transactions that had not yet been recorded internally.

The outstanding check will clear once the supplier deposits the payment, while the deposit in transit will appear on the next bank statement.

After recording the bank fee and interest income, Blue Ridge Bakery’s cash balance is accurate and verified.

Bank reconciliation template

A bank reconciliation template gives you a standardized format for recording and organizing each reconciliation consistently.

Using a template helps ensure all necessary steps are followed and all reconciling items are properly documented.

For consistency, always use the same format for every reconciliation. Here’s a simple template structure to follow: 

Bank statement

Record all transactions and the closing balance exactly as they appear on your bank statement for the reconciliation period.

Transaction	Movement	Amount
Opening balance		$X
Sale/deposit	Inflow	+$X
Supplier payment	Outflow	-$X
Bank fees	Outflow	-$X
Closing balance		$X

Internal records

Record the same reporting period using your company’s accounting records, including any transactions that may not yet appear on the bank statement.

Transaction	Movement	Amount
Opening balance		$X
Sale/deposit	Inflow	+$X
Supplier payment	Outflow	-$X
Closing balance		$X

Reconciliation summary

Use this section to record any differences identified during the reconciliation process and the action taken to resolve them.

Item	Type	Amount	Action
Outstanding check	Timing difference	$	Adjust bank balance
Deposit in transit	Timing difference	$	Adjust bank balance
Bank fees	Book adjustment	$	Adjust book balance
Interest income	Book adjustment	$	Adjust book balance
Other adjustments		$

When the adjusted bank balance and adjusted book balance match, your reconciliation is complete.

Using bank reconciliation as a learning opportunity

Every bank reconciliation is an opportunity to strengthen your financial processes. As well as correcting discrepancies, it helps you understand why they occurred and reduce the likelihood of similar issues in the future.

By reviewing your records consistently, you may notice recurring patterns, such as:

• Duplicate transactions.
• Missing or incorrectly recorded entries.
• Repeated timing differences.
• Frequent bank fees or unexpected charges.
• Delays in recording customer payments or supplier payments.

Identifying these patterns helps you improve your bookkeeping processes, strengthen internal controls, and resolve issues more quickly in future reconciliations.

Over time, this leads to more accurate financial records and greater confidence in your cash position.

It also makes downstream accounting tasks, including general ledger reconciliation and financial reporting, more efficient by reducing the number of discrepancies that need to be investigated.

Tips for efficient bank reconciliation

The most effective bank reconciliations are completed regularly, supported by organized records, and, where possible, automated.

These habits reduce the time the process takes while improving the accuracy of your financial records.

To make reconciliation more efficient and easier to manage, consider the following five best practices:

1. Reconcile on a set schedule

The longer you wait between reconciliations, the more transactions accumulate and the harder discrepancies become to trace.

Monthly reconciliation is suitable for many businesses, while those with higher transaction volumes may benefit from weekly or daily reviews.

2. Use accounting software

Integrated accounting software can automatically match transactions, highlight discrepancies, and reduce manual data entry.

For businesses managing multiple accounts or high transaction volumes, automation can significantly improve efficiency.

3. Keep records organized

Store bank statements, receipts, and supporting documents in a consistent, easy-to-access format.

Having records organized by month and account makes it easier to investigate discrepancies and reduces time spent searching for missing information.

4. Consolidate inactive accounts

If a bank account has little or no regular activity, consider closing it and consolidating funds into a more active account.

Managing fewer accounts simplifies the reconciliation process and reduces administrative work.

5. Automate where possible

Bank feeds that sync directly with your accounting software can reduce manual entry, while automated rules categorize recurring transactions.

Many modern accounting platforms also use AI and machine learning to identify unusual transactions and potential discrepancies more quickly.

How does software improve bank reconciliation?

Bank reconciliation software automates the comparison of transactions between your bank statement and internal records, reducing manual effort, improving accuracy, and providing real-time visibility into your cash position.

While manual bank reconciliation offers control and can work for very small businesses, it requires comparing transactions line by line, a time-consuming and error-prone process.

Automated bank reconciliation, like the solutions available through Sage, saves time and enhances accuracy while integrating directly with your accounting systems.

Purpose-built bank reconciliation software pays for itself through the efficiency it enables.

This is particularly true for businesses managing high transaction volumes, multiple accounts, or multiple currencies.

With fewer mistakes and less re-work, automation can free up significant time for higher-value financial tasks.

Take control of your cash with bank reconciliation

Bank reconciliation is a fundamental control for any business that manages cash, but its value depends on doing it consistently, accurately, and with the right tools in place.

By understanding the different types of reconciliation, following a structured five-step approach, and learning from each reconciliation you complete, you can take control of your cash flow, catch problems early, and keep your financial records reliably accurate.

Sage’s integrated accounting software makes bank reconciliation faster, more accurate, and less labor-intensive while still delivering the key benefits of reliable financial reporting and early fraud detection.

Explore how Sage can support your reconciliation process and your broader financial management. 

Bank reconciliation FAQs

Who is responsible for conducting bank reconciliations?

Bank reconciliation is typically handled by a business’s accounting team. In smaller businesses, this may be the business owner or a bookkeeper, while larger organizations often assign the task to an accounting clerk or specialist with oversight from a controller or accounting manager.

As a best practice, the person performing the reconciliation should not be the same person responsible for handling cash receipts and disbursements, helping strengthen internal controls and reduce the risk of errors or fraud.

When should reconciling items be addressed?

Reconciling items should be addressed promptly. Temporary timing differences, such as outstanding checks or deposits in transit, typically resolve on their own as transactions clear. However, any errors in your records or the bank’s records, along with unexplained or suspicious transactions, should be investigated and corrected as soon as possible to maintain accurate financial records and reduce the risk of larger issues.

What is the difference between bank reconciliation and general ledger reconciliation?

Bank reconciliation compares your bank statement with your internal cash records to confirm the balances match. General ledger reconciliation is a broader process that verifies the accuracy of all accounts in your general ledger, not just cash. The adjusted cash balance confirmed during bank reconciliation then becomes part of the wider general ledger reconciliation process.

What are the most common causes of discrepancies in bank reconciliation?

The most common causes are outstanding checks (issued but not yet cleared by the bank), deposits in transit (recorded in your books but not yet processed by the bank), unrecorded bank fees or interest, and data entry errors.

Most discrepancies are simply timing differences that resolve once transactions clear. Any differences that persist or can’t be explained should be investigated promptly.

Can bank reconciliation detect fraud?

Bank reconciliation is an effective way to detect fraud early. By comparing your records with your bank statement transaction by transaction, you can identify unusual activity, such as unauthorized transfers, checks for incorrect amounts, or payments to unrecognized payees. Regular reconciliation makes it much harder for fraudulent activity to go unnoticed, especially when combined with strong internal controls, such as separating responsibility for handling cash from responsibility for performing the reconciliation.

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