Bank reconciliation: step-by-step guide with a worked example

Bank reconciliation is comparing your bank statement with your own records of the same bank account for the same period, explaining every difference and correcting your books where they are wrong. The goal is simple: after adjusting for timing differences and missing entries, the adjusted bank balance equals the adjusted book balance.

Adjusted bank balance = statement balance + deposits in transit − outstanding payments ± bank errors

Adjusted book balance = book balance + unrecorded receipts and interest − unrecorded fees, debits and returned payments ± book errors

If the two adjusted balances agree, the account is reconciled. If they don't, at least one item is still unexplained.

Why bank reconciliation matters

Your bank and your books record the same money, but not at the same moment and not always in the same way. Reconciling regularly catches:

• Missing or duplicate entries: a supplier payment nobody recorded, or a customer receipt entered twice.
• Bank fees and interest that only appear on the statement.
• Failed or returned payments: an invoice marked as paid although the money went back to the customer.
• Fraud and errors: payments you did not authorise, changed supplier bank details, or a mistake by the bank. The sooner you spot them, the better your chances of recovering the money.
• Wrong tax and cash reports: VAT or sales tax returns, profit figures and cash flow forecasts are only as reliable as the records behind them.

Your accountant or auditor will usually ask to see your bank reconciliations. The record-keeping rules that apply to your business differ from country to country, so check them with your accountant.

Why your bank balance differs from your books

Every difference falls into one of three groups:

• Timing differences: you recorded the transaction, but the bank has not processed it yet, or the other way around.
• Items only the bank knows about until you read the statement: fees, interest, direct debits and returned payments.
• Errors, usually in your books and occasionally at the bank.

These are the reconciling items you will meet most often:

A simple rule: if the item is already in your books and the bank will catch up, adjust the bank side and record nothing. If the bank is right and your books are missing it, record it in your books.

How to do a bank reconciliation step by step

1. 1Get the bank statement for the period, or export the transactions, together with your records of the same account (the bank account in your ledger or your cash book) for the same dates.
2. 2Check that the opening balances agree. The statement's opening balance should equal last period's reconciled closing balance. If it doesn't, fix the previous period first.
3. 3Match the receipts. Tick off each credit on the statement against a receipt in your books, using the amount, the date and the reference.
4. 4Match the payments. Do the same for each debit: supplier payments, salaries, taxes and card purchases.
5. 5Record the bank-only items in your books: fees, interest, direct debits, standing orders, card settlements and returned payments.
6. 6List the timing differences: payments issued but not yet cleared, and deposits in transit. Don't record them again, because they are already in your books.
7. 7Investigate the rest. Anything still unmatched is a missing entry, a duplicate, a wrong amount or a bank error. Correct your books, or ask the bank to correct its mistake.
8. 8Compute the adjusted balances with the formulas above. They must agree to the cent.
9. 9Review, sign off and lock the period. Ideally someone who does not make the payments reviews the reconciliation. Keep it with the statement and lock the period so reconciled entries can no longer change.

Bank reconciliation example

Your bank statement for March closes at €12,450.00, but the bank account in your books shows €11,483.30, a difference of €966.70. Working through the steps, you find three items on the bank side and five on the book side.

Both sides end at €10,820.00, so the account is reconciled. As a check, the bank-side items total −€1,630.00 and the book-side items −€663.30; the gap between them, €966.70, is exactly the original difference.

You now record the five book-side items in your books. The three bank-side items need no entry; they should appear on April's statement, and you tick them off then.

How often should you reconcile?

Reconcile every bank account at least once a month, before you close the month: a reconciled bank account is one of the first items on a month-end close checklist. Busy accounts with many transactions a day are easier to reconcile weekly, or even daily, because each round has fewer items to match and problems surface while people still remember the details.

Reconcile every place that holds the business's money, not just the main bank account:

• savings accounts and any other bank accounts, each one separately
• business credit cards, against the card statement
• balances held by online payment providers, against their payout reports
• cash registers and petty cash: count the cash, compare it with the cash book and record any shortage or surplus with an explanation

Tips for faster matching

• Put a reference number on every invoice and ask customers to quote it when they pay. A receipt that carries the invoice number matches in seconds.
• Use one bank account per purpose, for example one for customer receipts and one for payroll and taxes, and never mix private and business payments.
• Import statements instead of typing them. A CSV file or a direct bank connection removes typing errors and saves time.
• Set matching rules for recurring items such as bank fees, rent, loan instalments and subscriptions, so they are recorded the same way every month.
• Handle partial payments properly. Match the amount received to the invoice and leave the rest open, rather than marking the whole invoice as paid.
• Split grouped payments. When one transfer pays several invoices, allocate it across every invoice it covers. If the reference doesn't say which ones, ask the customer for a remittance advice.

Common mistakes

1. 1Forcing the balance with an unexplained adjustment entry instead of finding the difference.
2. 2Recording timing differences in the books, so an outstanding payment ends up counted twice.
3. 3Starting from an unreconciled opening balance, which carries last month's errors into this one.
4. 4Letting old items sit forever. A payment that has not cleared after several weeks, or a deposit that never arrived, needs investigating.
5. 5Comparing totals only. Two errors can cancel each other out, so match individual transactions.
6. 6Changing a reconciled period afterwards without reconciling it again.
7. 7Reconciling only at year end, when a single difference can take days to trace.

How Clientlly helps

In Clientlly you set up each bank and cash account with its opening balance, then bring in bank transactions by CSV import or, with supported banks, through a bank connection that synchronises them. Automatic bank matching pairs statement lines with the payments you have recorded, you match the rest manually, and account mapping sets the ledger accounts that bank and cash entries post to. Payments recorded against invoices, including one payment allocated across several invoices, and supplier payments post to the ledger automatically, while balance integrity warnings point out bank and cash balances that need checking. Accounting periods with closing checklists help you sign off and close the month; see the accounting module.