What Is a Bank Reconciliation and How Do You Do One Step by Step?
Your bank says you have $8,400. Your own records say $7,950. You stare at both numbers wondering who's lying. The answer is: neither. They're both right — they're just looking at the same reality from two different angles, with a timing gap between them.
A bank reconciliation is the process that closes that gap. It explains the difference, confirms your books are accurate, and catches anything — fees, errors, unauthorized transactions — that shouldn't be there.
Skip it and you're flying blind. Do it once a month and you always know exactly where you stand. Here's how.
Why Your Bank Balance and Your Records Never Match (At First)
On any given day, your bank statement and your own records will almost certainly show different balances. This is completely normal — and it's caused by a handful of predictable things:
The first two — outstanding checks and deposits in transit — are timing differences. They'll resolve themselves as the bank processes everything. The last two — bank charges and errors — are genuine discrepancies that need corrections in your books right now.
The reconciliation process identifies all four types and deals with each one appropriately.
The goal of a bank reconciliation isn't to make your raw bank balance match your raw book balance. It's to adjust both sides to arrive at the same "true" balance. Once they agree, you know your books are clean. This is the step most beginners skip — and why their reconciliations never work.
Step-by-Step: How to Do a Bank Reconciliation
You need two things: your bank statement for the period, and your cash book or accounting software record. Set them side by side.
People try to make their raw book balance match the raw bank statement balance directly. It doesn't work — and spending an hour trying to make it work is a common time trap. You must adjust both sides independently to a common "true" balance. Only then do you compare them. The two adjusted balances should be identical.
A Worked Example: Maria's Online Store
Maria sells handmade ceramics online. At the end of January, here's what she sees:
| Item | Bank Side ($) | Book Side ($) |
|---|---|---|
| Opening / raw balance | 9,240 | 8,590 |
| Add: Deposit in transit (Etsy payout, Jan 30) | +720 | Already recorded |
| Less: Outstanding check to supplier | −480 | Already recorded |
| Add: Bank interest earned (not in books) | Already posted | +14 |
| Less: Monthly maintenance fee (not in books) | Already charged | −24 |
| Adjusted Balance | $9,480 | $8,580 |
Still a $900 difference? That means there's an error somewhere. Maria digs deeper and finds she recorded a $900 client refund twice by accident. She deletes the duplicate entry from her books. Her adjusted book balance becomes $9,480. They match.
That's what the reconciliation did — it didn't just find the timing differences. It found the $900 recording error that would have quietly distorted her books for months.
The Fraud Detection Benefit Nobody Talks About
Here's the most underappreciated benefit of regular bank reconciliations: they catch fraud and unauthorized transactions before they compound.
If someone uses your business debit card without permission, or an employee makes a fraudulent transfer, it shows up as an unexplained difference on your reconciliation. If you only reconcile quarterly — or never — that person has 3 months of cover. Monthly reconciliation shrinks the window to 30 days.
This is why every serious accountant, auditor, and business advisor recommends monthly reconciliation as a non-negotiable. Not because accounting is exciting. Because money has a way of disappearing quietly, and reconciliation is how you notice.
What to Do When It Won't Balance
You've done both sides and they still don't match. Here's your systematic checklist for hunting down the difference:
- Check the math first. Re-add both columns. A simple arithmetic error is the most common culprit.
- Look for transposed numbers. If you recorded $540 and it should be $450, the difference will be divisible by 9. This is a classic sign of a transposition error.
- Check for an amount exactly equal to the difference. If you're off by $320, search your transactions for a $320 entry that might be on the wrong side or recorded twice.
- Compare line by line. Tick off matching items on both the bank statement and your cash book. Anything left un-ticked is your problem.
- Check if the difference is exactly double something. If it is, a payment may have been recorded as a receipt (or vice versa).
Tom's monthly reconciliation showed a $180 difference he couldn't explain. After 40 minutes of checking, his accountant found the culprit: a $640 supplier payment had been entered as $460 — a transposition. The $180 difference ($640 minus $460) was the tell. The trial balance flagged the imbalance; without it, $640 would have been showing as $460 in his expense records and his profit for the month would have been $180 too high. Not catastrophic — but wrong enough to matter at tax time.
Quick Reference Cheat Sheet
| Term | What It Means | Which Side It Adjusts |
|---|---|---|
| Outstanding Check | You wrote it and recorded it; bank hasn't cleared it | Subtract from Bank side |
| Deposit in Transit | You recorded it; bank hasn't posted it yet | Add to Bank side |
| Bank Service Charge | Bank deducted a fee you didn't record | Subtract from Book side |
| Bank Interest Earned | Bank credited interest you didn't record | Add to Book side |
| NSF Check | A check you deposited that bounced — money isn't actually there | Subtract from Bank and Book |
🎯 Your Action for Today
Pull up last month's bank statement and your accounting records. Work through the 8 steps above — even if you use software, do it manually once so the process becomes second nature.
- How many timing differences did you find?
- Were there any bank charges you'd forgotten to record?
- Did the adjusted balances match on the first try?
Share your result in the comments — especially if you found something unexpected. The weirdest reconciling items make for great learning moments.
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