ClosHow to Do a Bank Reconciliation, Step by Step
A bank reconciliation compares the closing balance on your bank statement with the cash balance in your books, and explains every difference between them. Done monthly, it catches errors, missing entries and unauthorised payments before they grow.
The two balances rarely agree on the day, and that is normal. A cheque you recorded on the 30th may not reach the bank until next month. A bank fee may be on the statement before anyone has booked it. The purpose is to show that each difference has a valid explanation.
What you need
- The bank statement for the period, with its closing balance
- The cash book or general ledger account for the same bank account and period
- Last month's reconciliation, with its open items
The five steps
- Start with both closing balances. Take them from the statement and the ledger, as at the same date.
- Carry forward last month's open items. Check whether each one has now cleared on the statement.
- Match transactions. Tick each statement line against a ledger line, using the amount, direction, date and reference. One bank line may match several ledger lines, such as a deposit made up of several receipts.
- Sort what is left. Items in the books but not yet at the bank adjust the bank side. Items at the bank but not yet in the books need an entry in your books.
- Compare the adjusted balances, then review. The two adjusted balances should be equal. A second person should then review and sign the reconciliation.
A worked example
| Bank side | Amount |
|---|---|
| Closing balance per bank statement | 52,400 |
| Add: deposit in transit | 3,200 |
| Less: outstanding cheques | (4,100) |
| Adjusted bank balance | 51,500 |
| Books side | Amount |
|---|---|
| Closing balance per ledger | 51,870 |
| Add: customer payment received directly at the bank, not yet booked | 250 |
| Less: bank charges not yet booked | (120) |
| Less: returned customer cheque | (500) |
| Adjusted book balance | 51,500 |
Both sides agree at 51,500, so the difference is fully explained. The three items on the books side need journal entries.
Common reasons a reconciliation will not balance
- Transposed figures. A difference divisible by 9 often points to swapped digits, such as 540 entered as 450.
- A sign error. A payment recorded as a receipt creates a difference of twice its amount.
- A wrong period. The statement and ledger must end on the same date.
- An old item nobody cleared. Review anything open for more than a month or two, and find out why.
- A wrong opening position. If last month's reconciliation did not agree, this month's will not either.
Good practice
- Reconcile every bank account at least monthly. High-volume accounts benefit from weekly or daily matching.
- Separate duties: the person who records cash should not be the only person who reconciles and reviews it.
- Keep evidence of who prepared and reviewed each reconciliation, and when.
- Give every open item a reason and an owner.
Doing it faster
A spreadsheet works well for a small number of lines. As volume grows, matching takes most of the time, and that is the part software does well. Closentry matches statement and ledger lines for you, including combined and split payments, then shows why each remaining item needs a person. You can compare spreadsheets and software to see which suits you.