What Is Bank Reconciliation? Definition, Steps, and Example

Bank reconciliation is the process of comparing the cash balance on your bank statement to the cash balance in your accounting records (general ledger), and identifying every transaction that explains the difference. The output — a bank reconciliation statement — proves your reported cash position is real. Every business with a bank account should do one at least monthly.

Why bank reconciliation matters

Reconciliation is the only routine accounting check that catches four serious problems at once:

• Bookkeeping errors — transposed digits, missing entries, posting to the wrong account.
• Bank errors — yes, banks make mistakes; reconciliation finds them while you can still dispute.
• Fraud — unauthorised cheques, ghost vendors, or skimming usually surface as unexplained debits.
• Timing differences — outstanding cheques and deposits in transit, which are normal but must be explained.

Auditors, lenders, investors, and tax authorities all rely on reconciled cash balances. Unreconciled books are a red flag in any due diligence.

The 5 steps of bank reconciliation

1. Compare opening balances. The book balance at the start of the period should equal the bank balance at the start, adjusted for prior-period reconciling items.
2. Match transactions. Tick off every bank deposit against a ledger debit to cash, and every bank withdrawal against a ledger credit to cash.
3. List unmatched items. Group them: (a) on bank, not on books — usually fees, interest, direct debits; (b) on books, not on bank — usually outstanding cheques and deposits in transit.
4. Post adjustments. Record the bank-only items in your books (debit fees, credit cash, etc.). Don't touch outstanding cheques — they'll clear next period.
5. Prove the difference is zero. Bank balance ± reconciling items = book balance ± reconciling items. If it doesn't, hunt the error.

Worked example

Suppose at month end:

• Bank statement balance: $12,450
• Book (GL) balance: $11,980
• Difference: $470

You investigate and find:

• Outstanding cheque #2041 to a vendor: $300 (on books, not yet on bank)
• Bank service charge: $25 (on bank, not on books)
• Interest earned: $5 (on bank, not on books)
• Deposit in transit: $850 (on books, not on bank)

Reconciled bank balance: $12,450 − $300 + $850 = $13,000.
Reconciled book balance: $11,980 − $25 + $5 + $1,040 (a deposit you forgot to record) = $13,000. ✓

You'd post journal entries for the bank charge, interest, and forgotten deposit. The outstanding cheque and deposit in transit need no entry — they're already in your books.

Common reconciliation errors and how to fix them

• Same transaction recorded twice in books. Reverse one of them.
• Transposition error (e.g. recorded $189 as $198). Difference will always be divisible by 9 — a useful clue.
• Wrong sign / debit-credit flipped. Difference will be exactly 2× the amount.
• Bank fee never recorded. Post a journal: debit Bank Fees expense, credit Cash.
• Cheque written but never recorded. Post a journal: debit relevant expense, credit Cash.

Manual reconciliation vs. automated reconciliation

Manual reconciliation in Excel takes 30 minutes to several hours per account, scales linearly with transaction volume, and is error-prone after the first few hundred lines. Automated reconciliation software ingests both feeds, matches the obvious 95% in seconds, and surfaces only the exceptions — collapsing the work to minutes regardless of volume.

If you reconcile more than one account or process more than 200 transactions per month, automated tools like BankReconPro pay for themselves on the first run.