How to Prepare a Bank Reconciliation

A bank reconciliation explains why the cash balance in the accounting records differs from the balance shown by the bank at a particular date. Differences often arise from outstanding checks, deposits in transit, bank fees, interest, direct debits, returned payments, timing, or errors. A well-prepared reconciliation identifies every difference and proves that the adjusted bank balance agrees with the adjusted book balance.

Bank reconciliation is one of the most important accounting controls because cash is vulnerable to mistakes, duplicate entries, unauthorized transactions, and fraud. It should be completed promptly by someone who can investigate differences and, where possible, reviewed by a person who did not prepare or authorize the transactions.

Quick Answer

To prepare a bank reconciliation, obtain the bank statement and cash ledger for the same period, confirm the opening balance, match deposits and withdrawals, list deposits in transit and outstanding checks, identify bank-only items and errors, post required book adjustments, calculate adjusted bank and book balances, investigate any remaining difference, and retain the statement, reconciliation, support, and approval.

Step 1: Gather the Records

• Complete bank statement for the account and period
• General-ledger cash or bank account
• Prior reconciliation
• Check register and payment reports
• Deposit slips and receipt reports
• Electronic transfer, card settlement, and direct-debit records
• Bank notices for fees, interest, returns, and corrections

Use statements obtained independently from the bank when possible rather than documents supplied only by the employee who handles cash.

Step 2: Confirm the Opening Position

Begin with the prior month’s reconciled balance and outstanding items. Confirm that old outstanding checks and deposits either cleared in the current period or remain valid. Investigate items that have remained outstanding unusually long.

Do not restart every month without carrying forward unresolved timing differences. The opening reconciliation is part of the audit trail.

Step 3: Match Deposits

Compare each deposit in the ledger with the bank statement using amount, date, batch, customer reference, and payment channel. Mark matched items once. For grouped deposits, reconcile the full batch and retain a schedule connecting individual receipts to the bank total.

A deposit recorded in the books before period end but credited by the bank afterward is a deposit in transit. Verify that it cleared shortly after the reporting date.

Step 4: Match Payments and Withdrawals

Match checks, transfers, card payments, direct debits, payroll, loan payments, and cash withdrawals. Check both amount and payee or reference. Similar round amounts can be matched incorrectly if you look only at value.

A payment recorded in the books but not yet presented to the bank is an outstanding check or payment. Confirm that it is legitimate and has not become stale, cancelled, or duplicated.

Step 5: Identify Bank-Only Transactions

Common bank-statement items missing from the books include:

• Bank fees
• Interest income or expense
• Automatic loan payments
• Merchant processing fees
• Direct debits and subscriptions
• Returned customer payments
• Foreign-exchange charges
• Bank corrections

Obtain support and record valid items in the accounting system. Do not post an unidentified withdrawal to a miscellaneous expense account merely to complete the reconciliation.

Step 6: Identify Book Errors

Look for duplicated entries, transposed digits, wrong dates, incorrect bank accounts, omitted transactions, and net amounts recorded instead of gross amounts. Correct errors through an approved journal or transaction change that preserves the audit trail.

If the bank made an error, contact the bank and keep the item as a reconciliation difference until corrected. Do not change the company’s books to imitate an incorrect bank entry unless the underlying transaction genuinely belongs to the company.

Step 7: Calculate the Adjusted Bank Balance

A common format is:

Bank statement ending balance
+ deposits in transit
− outstanding checks and payments
± bank errors
= adjusted bank balance

Use the correct sign for overdrafts and other unusual balances.

Step 8: Calculate the Adjusted Book Balance

Start with the ledger balance and include entries that the bank recorded but the business had not yet entered:

Book balance
+ interest and other bank credits
− fees, direct debits, returned items, and other bank charges
± book corrections
= adjusted book balance

Post the adjustments before finalizing the reconciliation so the adjusted book balance agrees with the general ledger.

Step 9: Prove Both Adjusted Balances Agree

The adjusted bank balance and adjusted book balance must be equal. If they differ, calculate the exact difference and look for:

• A missing item equal to the difference
• A transaction entered on the wrong side
• A transposition divisible by nine
• An outstanding item included twice
• An incorrect opening balance
• A batch matched to the wrong amount
• A journal posted after the ledger report was printed

Never use an unexplained plug or “reconciliation expense” to force agreement.

Step 10: Review Outstanding Items

For every outstanding item, record date, amount, payee or source, reference, reason, and expected clearing date. Follow up old checks, duplicate payments, unclaimed payroll, customer deposits, and transfers between accounts.

Old items may require cancellation, reissue, escheat or unclaimed-property treatment, correction, or investigation under local rules.

Worked Example

The bank statement shows $28,500. The books show $27,850. There is a $3,000 deposit in transit and $2,400 of outstanding checks. The bank charged a $75 fee and credited $125 interest not yet recorded.

Adjusted bank balance = $28,500 + $3,000 − $2,400 = $29,100

Adjusted book balance = $27,850 − $75 + $125 = $27,900

The balances still differ by $1,200, so the reconciliation is not complete. Investigation might reveal an omitted customer receipt, an incorrect book balance, or another unmatched transaction. Do not finalize until the $1,200 is explained and posted or classified properly.

Step 11: Approve and Retain the Reconciliation

The preparer should sign and date the reconciliation. The reviewer should inspect unusual items, old outstanding transactions, large journals, transfers, and evidence that the ledger agrees with the final adjusted balance.

Retain the bank statement, matched transaction detail, outstanding-item list, adjusting entries, explanations, and approval according to the record-retention policy.

Common Bank Reconciliation Mistakes

• Reconciling to the online current balance instead of the statement date
• Posting deposits in transit as new revenue
• Recording outstanding checks twice
• Matching by amount without checking reference
• Ignoring returned customer payments
• Carrying old outstanding items indefinitely
• Using a plug to make balances agree
• Allowing the same person to receive cash, post entries, and approve the reconciliation without review

Writer’s Opinion

A bank reconciliation should be treated as an investigation, not a checkbox. I would focus reviewer attention on old items, manual journals, transfers near period end, unfamiliar payees, and repeated round-number adjustments. Those areas often reveal the most important errors or control weaknesses.

I also recommend reconciling high-volume accounts weekly or daily even when formal financial reporting is monthly. Faster reconciliation limits the number of transactions that must be investigated at once.

Video Guide: Bank Reconciliation

[youtube=https://www.youtube.com/watch?v=kjufilAfWoQ]

Frequently Asked Questions

Why is the bank balance different from the ledger?

Timing differences, fees, interest, direct debits, returned payments, outstanding checks, deposits in transit, and errors commonly cause differences.

Do outstanding checks require a journal entry?

Not merely because they have not cleared. They are usually already recorded in the books. A journal may be needed if a check is cancelled, stale, duplicated, or otherwise corrected.

What is a deposit in transit?

It is a deposit recorded in the company’s books before the reporting date that the bank credits afterward.

How often should bank accounts be reconciled?

At least at every reporting period, and more frequently for active or high-risk accounts. Many businesses reconcile major accounts weekly or daily.

Should closed bank accounts be reconciled?

Yes. Reconcile through the closing date, record final fees or transfers, and confirm the ledger reaches the correct closing balance.

Final Checklist

• The statement and ledger cover the same account and date.
• Opening outstanding items are reviewed.
• All deposits and withdrawals are matched.
• Bank-only transactions are supported and posted.
• Outstanding checks and deposits in transit are valid.
• Adjusted bank and book balances agree exactly.
• No unexplained plug remains.
• The reconciliation is reviewed, signed, and retained.

A complete bank reconciliation proves cash rather than assuming it. Match every transaction, separate timing from errors, post the books correctly, and investigate until both adjusted balances agree.