What Is Bank Reconciliation? Meaning, Purpose and Process

Quick Answer: A bank reconciliation is a check that your own record of a bank account and the bank's record of that same account agree once known differences are explained. You start from the two balances on one date, account for items that only one side has recorded yet, and fix any mistakes. When both adjusted figures are equal, the account is reconciled.

Bank reconciliation means comparing the cash balance in your books with the balance the bank reports for the same date, then explaining every dollar of difference. Most gaps are harmless timing items, such as a check your supplier has not cashed. The rest are fees you never recorded, deposits that bounced, or plain errors, and finding those is the point of the exercise.

Bank reconciliation in plain terms

Picture two people keeping score of the same game from different seats. You write down a payment the moment you mail a check. The bank writes it down only when the check comes back through clearing, sometimes a week or a month later. The bank, in turn, knows about the $14 monthly maintenance fee and the interest it credited, which you will not see until the statement arrives. Neither scorekeeper is wrong; each has information the other lacks.

Reconciling is the conversation between those two scorekeepers. You sit down with the bank statement in one hand and your ledger, check register or accounting software in the other, and you work out why the totals differ. If every difference has a reason you can name and prove, you can trust the number. If a gap is left over that nobody can explain, something has gone wrong and you go looking for it.

The word itself comes from bringing two things back into agreement. A reconciled bank account is simply one where that agreement has been reached and documented for a particular cut-off date, usually the last day of the statement period.

What does a bank reconciliation compare?

It compares two records of one pool of money. The table shows how they differ.

In accounting language, the book balance is the general ledger cash account (a debit balance when you have money in the bank). The bank keeps your account as a liability it owes you, so on its side the same money is a credit balance. That reversal is why a deposit is a "credit" on a bank statement even though it is a debit in your books.

Why do the two balances drift apart?

Differences fall into three families, and it helps to sort them before you start ticking items.

• Timing. Something is real and recorded on one side, and the other side simply has not caught up. A check mailed on the 29th and a deposit dropped in the night safe on the 31st are classic cases. These resolve themselves next month without any entry.
• Information only the bank has. Fees, interest earned, a customer's check returned unpaid, a loan payment the bank pulls automatically, or a wire a customer sent directly. Your books are incomplete until you record these.
• Errors. You keyed $571 as $517, recorded one payment twice, or posted a transfer to the wrong account. Banks make mistakes too, though less often, such as crediting a deposit to another customer.

Only the second and third families ever require a journal entry in your books. Timing items are listed on the reconciliation and then watched until they clear. The companion guides go deeper on outstanding checks and on where bank service charges go.

How does a bank reconciliation work?

At a glance, the process has five moves:

1. Fix the date. Choose the statement's closing date and use the book balance on that same day, not today's balance.
2. Match what both sides have. Go down the statement and tick each deposit and withdrawal that also appears in your records for the same amount.
3. List what only you have. Unticked items in your books dated inside the period are usually uncashed checks or deposits the bank has not credited yet. Add the uncredited deposits to the bank balance and subtract the uncashed checks.
4. List what only the bank has. Unticked lines on the statement are usually fees, interest or returned items. Record them in your books, which changes the book balance.
5. Compare the adjusted figures. If the adjusted bank balance equals the adjusted book balance, you are done. If not, the leftover amount points you to an error.

A quick illustration with made-up figures: suppose your ledger shows $8,412.60 on March 31 and the statement shows $9,037.15. You find $1,180.00 of checks not yet cashed and a $540.00 deposit made on the 31st that the bank posted on April 1. Adjusted bank balance: $9,037.15 + $540.00 − $1,180.00 = $8,397.15. On the statement you also find a $15.45 wire fee you never recorded, so the adjusted book balance is $8,412.60 − $15.45 = $8,397.15. The two match. For a longer worked case with an error in it, see the bank reconciliation example.

What is the purpose of a bank reconciliation?

Several purposes sit under one routine.

Accurate cash. The ledger is the number you plan payroll and purchases around. Without reconciling, it silently drifts as fees and returned deposits pile up unrecorded.

Catching errors early. A transposed digit is easy to fix when the month is fresh in your mind and hard to trace a year later during tax preparation.

Spotting fraud and unauthorized charges. A reconciliation forces someone to look at every line the bank paid. For consumer accounts, the CFPB explains that you generally need to notify your bank within 60 days after it sends the statement showing an unauthorized electronic transaction, or you risk liability for later transfers. A monthly reconciliation keeps you well inside that window.

Reliable financial statements and tax records. The cash line on a balance sheet should be a reconciled figure. Lenders, investors and auditors expect to see the reconciliation behind it.

Knowing which items are still open. The list of uncashed checks and pending deposits tells you what will hit the account next month, which matters when the balance is tight.

What type of internal control is a bank reconciliation?

A bank reconciliation is a detective control. It does not stop a bad payment from leaving the account; it finds one after the fact by comparing an independent record (the bank's) against your own. Preventive controls, such as requiring two signatures on large checks, work alongside it.

The control is only as strong as the separation around it. Midwestern State University's controller's office, for example, requires monthly reconciliation of all its bank accounts by the 25th of the following month and states that the preparer cannot also record transactions or handle cash, with a separate employee posting any journal entries and an approver signing off. The reasoning is simple: a person who can both move money and reconcile the account can hide their own mistakes or theft.

Small businesses rarely have enough staff for full separation. The usual compensating step is for the owner to open the statement personally, scan the payees and check images, and initial the finished reconciliation each month.

Bank reconciliation in accounting terms

Textbooks define it more formally: a bank reconciliation is a schedule that explains the difference between the cash balance per books and the balance per bank statement at a given date, and that computes the correct (or "true") cash balance. Two points follow from that definition.

First, the correct balance is usually neither of the starting figures. It is the book balance after recording bank-only items and correcting book errors, which should equal the bank balance after timing items and bank errors.

Second, only book-side adjustments are journalized. A bank fee becomes a debit to bank charges expense and a credit to cash. A returned customer check becomes a debit to accounts receivable and a credit to cash. Deposits in transit and outstanding checks are never entered, because your books already have them right. Commerce and A-level courses often call the finished schedule a bank reconciliation statement; the guide to the bank reconciliation statement covers that document and its formats.

Where the bank-side data comes from

Reconciling is faster when the bank's side is in rows you can sort, rather than a PDF you scroll. You have a few options:

• Bank feeds inside QuickBooks, Xero and similar software pull transactions automatically and are the natural choice when your bank supports them.
• The bank's own CSV or Excel download from online banking, when it covers the dates you need.
• A statement converter for older months or accounts with no export. QuickBankConvert takes the statement PDF you downloaded yourself, with no bank login, and returns one row per transaction with a signed amount, so withdrawals appear as negatives you can total against your ledger.

Whichever source you use, reconcile against the official statement's closing balance, because that is the figure your bank stands behind. The step-by-step procedure lives in the bank statement reconciliation guide.

Related guides

• Bank statement reconciliation guide: the full procedure, start to finish.
• Bank reconciliation example: numbers worked through line by line.
• What is a bank reconciliation statement?: the document, its layout and types.
• Reconciled bank statement: what the finished result looks like and what to keep.