Bank reconciliation, explained with an example.
What a bank reconciliation proves, the items that make the bank and the books differ, and a worked example that ties a statement to the general ledger to the cent.
Key points
- A bank reconciliation proves the cash in your ledger matches the bank, with every difference explained.
- Differences on the bank side are usually timing: deposits in transit and outstanding checks. Differences on the book side need entries: fees, interest and errors.
- Reconcile daily and the month-end reconciliation becomes a review, not a project.
What a bank reconciliation proves
A bank reconciliation compares the cash balance in your general ledger with the balance on the bank statement and explains every difference. When it’s done, the adjusted bank balance and the book balance agree.
It proves the cash on your balance sheet is there. It also catches what the bank has recorded that you haven’t, and the other way round.
Why the two balances differ
| Item | Where it shows | What to do |
|---|---|---|
| Deposit in transit | In your books, not yet on the statement | Add it to the bank balance |
| Outstanding check | In your books, not yet cleared | Subtract it from the bank balance |
| Bank fee or charge | On the statement, not in your books | Record it, reducing the book balance |
| Interest earned | On the statement, not in your books | Record it, increasing the book balance |
| Returned deposit | On the statement, not in your books | Record it and follow up the customer |
| Error | On either side | Correct it where it was made |
A worked example
Halden Software’s operating account on September 30, from the Chase statement:
| Amount | |
|---|---|
| Balance per bank statement | $2,418,306.55 |
| Add: deposit in transit | $86,500.00 |
| Less: outstanding checks | ($41,220.00) |
| Adjusted bank balance | $2,463,586.55 |
| General ledger, 1010 Cash – Operating | $2,463,586.55 |
| Difference | $0.00 |
The deposit was recorded on September 30 and reached the bank on October 1. The checks were written in September and hadn’t cleared. Both are timing: they need no entry, only a note that they cleared the next month.
Had the statement shown a $35 wire fee the books didn’t have, the book side would need an entry for it before the two balances agreed.
Step by step
- Take the ending balance on the bank statement and the ending balance in the ledger, for the same date.
- Match each transaction on the statement to the ledger: deposits to receipts, withdrawals to payments.
- List the ledger items not on the statement: deposits in transit and outstanding checks.
- List the statement items not in the ledger: fees, interest and returned deposits.
- Record entries for the book-side items and correct any errors.
- Confirm the adjusted balances agree, attach the statement and sign off.
Recording the book-side entries
Items on the bank side need no entry; they clear on their own. Items on the book side need an entry before the balances agree.
| Item | Debit | Credit |
|---|---|---|
| Bank fee | Bank fees expense | Cash |
| Interest earned | Cash | Interest income |
| Returned customer deposit | Accounts receivable | Cash |
| Deposit recorded twice in error | The account it was credited to | Cash |
Post them in the period the bank recorded them, with the statement attached as support.
Credit cards and other accounts
A credit card account reconciles the same way, against the card statement. The usual differences are charges posted after the statement date and payments in transit.
With several bank accounts or entities, reconcile each one separately, then check that transfers between them appear on both sides in the same period. A transfer recorded out of one account and not yet into the other is the most common difference between entities.
What auditors look for
- Timeliness. Reconciliations finished soon after month end, not rebuilt at year end.
- A preparer and a reviewer. Two people, each named, with the date they signed off.
- Support attached. The statement and the detail behind each reconciling item.
- Clean aging. Few reconciling items older than a month, and a note on each one that is.
Common problems
- Plugging the difference. A plug hides an error until it grows. Every difference should have a reference.
- Stale outstanding checks. Checks outstanding for months should be investigated, and voided or handled under your state’s unclaimed property rules.
- Reconciling only at month end. A month of unmatched activity is slow to work through. Daily matching keeps it small.
Beyond cash
The same method applies to every balance sheet account: tie the balance to an independent source and explain the differences. Card accounts tie to card statements, prepaids to the schedule and deferred revenue to the contracts.
Zenday’s Reconciliation agent matches bank and card activity daily and reconciles the balance sheet with every difference explained, never plugged. See account reconciliation in Zenday.
In ZendayAccount reconciliationEvery account reconciled daily, with the reconciling items explained and the support attached.