Bank reconciliation is one of the most fundamental financial controls a business can maintain. When your bank statement and your internal cash records don’t agree, something has gone wrong. It could be timing, an error, or a missing transaction. The reconciliation process is how you find out which and fix it before it compounds.
This guide explains what bank reconciliation is, why it matters, how to do it step by step, and how to handle the most common adjustments your team will encounter.
Understanding Bank Reconciliation
What is bank reconciliation?
Bank reconciliation is the process of comparing your company’s internal cash records (your cash book or general ledger cash account) against your bank statement to confirm that they agree. Any difference between the two is a discrepancy that needs to be explained and resolved.
The process is typically completed monthly, aligned to the end of the bank statement period, although some businesses with high transaction volumes do it more frequently. Reconciliation helps confirm that every transaction recorded in your books is reflected accurately in your company’s bank account, and vice versa.
Why is bank reconciliation important?
Without regular reconciliation, errors in financial statements accumulate silently. A payment recorded twice, a deposit entered with the wrong amount, or a bank fee not captured in your books can each distort your reported cash position. Over time, small discrepancies become large ones, and by the time they’re discovered, unwinding them is significantly more work.
Bank reconciliation also serves as a fraud detection control. Unauthorized transactions, duplicate payments, and diverted funds are more likely to be caught quickly when someone is regularly comparing what the bank shows against what your books record. For businesses with multiple payment channels or high transaction volumes, this control is especially important.
The Four Steps of the Bank Reconciliation Process
The reconciliation process follows four consistent steps. How long each step takes depends on your transaction volume, the quality of your records, and the number of exceptions you encounter.
Step 1: Gather your documents
You need three things to start:
- Your bank statement for the period
- Your internal cash records (the general ledger cash account or cash book)
- The completed reconciliation from the prior period.
The prior reconciliation confirms your opening balance and identifies any items that carried forward, such as outstanding checks that hadn’t cleared when last month’s reconciliation was done.
Step 2: Compare and identify discrepancies
Go through your bank statement and your internal records side by side. Mark off every transaction that appears in both. What you’re left with is the list of discrepancies: items in your books that haven’t hit the bank yet, items on the bank statement that aren’t in your books, and any errors on either side. These discrepancies aren’t necessarily problems. In fact, many are simply timing differences, but identifying them is the point.
Step 3: Adjust your book balance
Some discrepancies reflect transactions that the bank has processed but that you haven’t yet recorded in your books.
Bank service fees are a common example, and interest earned on your account is another. Credit card processing fees, returned items, and bank charges also fall into this category.
For each of these, you need to create a journal entry in your accounting system to bring your book balance in line.
Step 4: Adjust the bank balance for timing differences
The bank balance also needs adjustment for items you’ve recorded in your books that haven’t cleared the bank yet. Deposits in transit are payments you’ve received and recorded, but that haven’t appeared on the bank statement. Outstanding checks are payments you’ve issued and recorded, but that the payee hasn’t yet cashed. These are timing differences rather than errors, and they’re expected in any active account.
Once both sides are adjusted, they should agree. If they don’t, there is still an unresolved discrepancy that needs investigation.
Example of a Bank Reconciliation
A practical example makes it easier to understand how bank reconciliation works.
Imagine that at the end of the month, your bank statement shows a balance of £24,500, while your company’s cash account shows a balance of £25,000.
After comparing both records, you identify the following reconciling items:
- £1,200 of outstanding checks that have been recorded in your books but have not yet cleared the bank.
- £500 of deposits in transit that have been received and recorded but do not yet appear on the bank statement.
- £200 of bank service charges that appear on the bank statement but have not yet been recorded in your accounting system.
Step 1: Adjust the Bank Balance
Start with the balance shown on the bank statement:
| Bank Statement Reconciliation | Amount |
| Ending bank statement balance | £24,500 |
| Less: Outstanding checks | (£1,200) |
| Add: Deposits in transit | £500 |
| Adjusted bank balance | £23,800 |
Step 2: Adjust the Book Balance
Next, adjust your internal cash records:
| Book Balance Reconciliation | Amount |
| Ending cash book balance | £25,000 |
| Less: Bank service charges | (£200) |
| Less: Duplicate customer payment recorded in error | (£1,000) |
| Adjusted book balance | £23,800 |
Reconciled Balance
After accounting for the timing differences and correcting the bookkeeping error, both balances equal £23,800.
| Reconciled Balances | Amount |
| Adjusted bank balance | £23,800 |
| Adjusted book balance | £23,800 |
Because the adjusted balances match, the reconciliation is complete.
What This Example Shows
In most reconciliations, discrepancies arise from one of two causes:
- Timing differences, such as outstanding checks and deposits in transit.
- Unrecorded or incorrectly recorded transactions, such as bank fees, interest income, duplicate entries, or missing payments.
The objective of bank reconciliation is to identify and explain every difference so that both the bank records and accounting records reflect an accurate cash position.
Bank Reconciliation Statement
A bank reconciliation statement is a structured summary that explains the difference between a company’s cash balance in its accounting records and the balance shown on its bank statement at a specific point in time. It documents the adjustments made on both sides and shows how the two figures are brought into alignment.
Unlike the step-by-step reconciliation process, which is often performed in accounting software or spreadsheets, the bank reconciliation statement is the output. In other words, it’s the final explanation of how and why the balances differ, and how those differences are resolved.
In practice, the statement brings together all reconciling items in one place. This typically includes deposits in transit that have been recorded internally but not yet processed by the bank, outstanding checks that have been issued but not yet cleared, and bank-initiated transactions such as service charges or interest that have not yet been recorded in the company’s books. It also captures any corrections made for errors such as duplicate entries or incorrect amounts.
The purpose of the bank reconciliation statement is to provide a clear audit trail. It allows finance teams, auditors, and stakeholders to see exactly how the final reconciled balance was reached without having to retrace every transaction individually. It also acts as a control document, confirming that all known differences between the two records have been identified and accounted for.
Once all adjustments are included, the statement demonstrates that the adjusted bank balance and adjusted book balance are equal, confirming that the cash position is accurate and fully reconciled.
Common Bank Reconciliation Adjustments
Most reconciliations involve a predictable set of adjustment types. Understanding each one helps you complete the process faster and with fewer errors.
Deposits in transit: Payments received and recorded before the bank statement period closed but not yet reflected in the bank statement. Add these to the bank statement balance.
Outstanding checks: Checks written and recorded in your books but not yet presented to or cleared by the bank. Deduct these from the bank statement balance.
Bank service charges: Fees charged by the bank and not yet recorded in your books. Create a journal entry to record these as an expense.
Interest income: Interest earned on your account and credited by the bank but not yet captured in your records. Record this as income.
Returned items: Checks or payments that were initially recorded but subsequently bounced or were reversed. Reverse the original entry and record the returned item.
Data entry errors: Transpositions, duplicates, or incorrect amounts recorded in either your books or the bank’s system. Identify which side contains the error and correct it.
Bank Reconciliation Best Practices
The process is straightforward in principle, but keeping it efficient in practice requires a few consistent habits.
- Reconcile at the same time each month, ideally as close to the statement date as possible. The longer you wait, the harder it becomes to identify and explain discrepancies.
- Maintain supporting documentation for every journal entry made during the reconciliation process. This ensures you can clearly justify adjustments during audits or internal reviews.
- Prioritize outstanding items from previous periods. Items such as uncleared checks that persist over multiple months often indicate errors or missing payments rather than simple timing differences and should be investigated promptly.
- Avoid carrying unresolved items forward unnecessarily. Allowing discrepancies to accumulate across periods increases complexity, reduces visibility over cash positions, and introduces financial reporting risk.
Final Thoughts
Bank reconciliation is a control that pays for itself. The time invested in a monthly reconciliation is far less than the time required to untangle months of unresolved discrepancies.
For businesses scaling their transaction volume, automation makes the process faster and more accurate without removing the oversight that makes reconciliation valuable.
How Kolleno Supports Payment Reconciliation
For businesses handling high volumes of transactions across multiple payment channels, manual reconciliation becomes a bottleneck. Kolleno’s Payments Reconciliation module automates the matching of incoming payments to open invoices across all channels, reducing the manual effort involved in reconciliation and improving accuracy at every step.
The platform connects directly to your ERP, so matched and reconciled transactions post automatically without re-entry. AI Agents handle the volume, while your team handles the exceptions, so you receive human expertise with AI execution.
Book a demo today.
Bank Reconciliation FAQs
What do you mean by bank reconciliation?
Bank reconciliation is the process of comparing your company’s internal cash records against your bank statement to confirm they agree. The goal is to identify and explain any differences between the two, whether caused by timing (transactions not yet cleared) or errors (amounts recorded incorrectly). Once both sides are reconciled, you have a confirmed, accurate cash position.
What is a bank reconciliation journal entry?
A bank reconciliation journal entry is a record you create in your accounting system to capture transactions that appear on your bank statement but haven’t been recorded in your books. Common examples include bank service fees, interest earned, and returned items. Each entry brings your book balance in line with what the bank shows, ensuring your records are complete and accurate.
What are common bank reconciliation errors?
The most common errors in bank reconciliation are transposition mistakes (recording 637 instead of 673, for example), duplicate entries, missed transactions, and timing errors where a transaction is assumed to have cleared when it hasn’t. Outstanding checks that have sat uncleared for months are also a frequent issue. Regular reconciliation catches these quickly; infrequent reconciliation lets them compound.
What happens if balances don’t match after reconciliation?
If your adjusted book balance and adjusted bank balance still don’t agree after completing the four steps, there is an unresolved discrepancy. Start by reviewing your journal entries for errors, then re-check the original comparison for any transactions you may have missed or marked incorrectly. If you can’t find the difference, contact your bank to confirm statement accuracy and review recent transaction records for duplicate or reversed entries.
