Bank Reconciliation

Bank reconciliation is the periodic comparison of one cash account’s general ledger balance on a given date against the balance the bank reports for that same account on that same date, with every difference between the two identified and documented until both sides resolve to a single adjusted cash balance. It proves one account rather than the whole ledger, and it is finished only when the adjusted balance computed from the bank statement and the adjusted balance computed from the books are identical.

The Two Sides of the Calculation

A bank reconciliation is two separate computations that have to land on the same number. Neither side is the answer on its own.

Balance per the bank statement, at the statement date
  add     deposits in transit
  less    outstanding checks
  add or less   bank errors
  = adjusted cash balance

Balance per the general ledger cash account, same date
  add     interest credited and deposits the bank recorded first
  less    service charges and returned items
  add or less   the company's own recording errors
  = the same adjusted cash balance

The bank side carries the two timing items. A deposit in transit is money the company has received, recorded and sent to the bank, which the bank had not credited by the statement date. An outstanding check is a check the company has written and recorded, which the payee has not presented for payment, so the bank has not taken it out of the balance yet. Both exist because the two records close on different clocks, and both clear themselves once the bank catches up.

The book side carries the items the bank knew about first. A service charge and an interest credit appear on the statement before anyone posts them. A lockbox or electronic deposit paid straight into the account by an outside party can land the same way. So can a returned item, meaning a customer’s check that was deposited and recorded as received and then sent back unpaid because the payer’s account did not cover it, commonly called an NSF check, for not sufficient funds.

An error sits on the side that made it, which is why both columns carry a line for one.

The identity of the two adjusted balances is the whole test. After the books are updated for items the reconciliation shows as not recorded or recorded incorrectly, the adjusted bank statement balance should equal the adjusted checkbook balance, and a difference that survives means the error is still sitting in one of the earlier steps (IRS Publication 583, Starting a Business and Keeping Records, Rev. December 2024). That publication runs its second column off the business checkbook and then has the journals updated for what the reconciliation turns up. In a firm’s books the same column starts from the general ledger cash account instead, and the arithmetic does not change.

How a Reconciling Item Gets Sorted

Differences sort into a few recurring kinds, and the sort decides what happens to each.

Timing differences. The transaction is recorded in the accounting records at a different moment from when it hits the bank account, which covers deposits in transit, outstanding items and open period items (Office of the Washington State Auditor, BARS GAAP Manual 3.1.9.15, Bank Reconciliations). Nothing has gone wrong, and nothing needs to be posted.

Activity only the bank has recorded. Interest earned, bank fees or charges, NSF checks, and unrecorded deposits such as lockbox transactions or electronic deposits made directly into the account by outside parties. The accounting records have to be updated for all of them, and an unrecorded deposit nobody can identify at the time is recorded to a suspense fund, a holding place for unclassified transactions, until it can be investigated and resolved (Office of the Washington State Auditor, BARS GAAP Manual 3.1.9.15, Bank Reconciliations).

Activity the books record differently. A transfer between two of the client’s own bank accounts, and a transaction the books record net where the bank shows it gross, both surface as reconciling items (Office of the Washington State Auditor, BARS GAAP Manual 3.1.9.15, Bank Reconciliations). No cash is missing in either case. The bank shows a movement the ledger never gave a line of its own, so the item resolves by tracing it to the account or the entry that absorbed it rather than by treating it as unexplained.

Errors. After adjusting for the kinds above there should be no difference left. Where one remains, the research runs to the transaction that caused it: an error in the accounting records gets corrected, and a bank error gets communicated and resolved with the bank (Office of the Washington State Auditor, BARS GAAP Manual 3.1.9.15, Bank Reconciliations).

Age takes an item out of the timing category without making it an error. An outstanding check carried past the point where the bank is no longer obliged to pay it has stopped being a timing difference, and the decision it now needs is worked through in account reconciliation services.

A Worked Reconciliation

Publication 583 illustrates a finished one for a single month.

Bank side
  Closing balance shown on bank statement        1,458.12
  Add deposits not credited                      1,217.41
  Subtotal                                       2,675.53
  Subtract outstanding checks                      526.50
  Adjusted balance per bank statement            2,149.03

Book side
  Balance shown in checkbook                     2,153.03
  Add deposit recorded short                         6.00
                                                 2,159.03
  Subtract bank service charge                      10.00
  Adjusted checkbook balance                     2,149.03

Source: IRS Publication 583, Rev. December 2024.

Two deposits had not reached the statement, and four checks written during the month had not been presented, which is the whole of the bank side. The book side carries a correction of $6.00, because a deposit of $600.40 had been entered as $594.40, and a bank service charge of $10.00 that the books had never seen (IRS Publication 583, Rev. December 2024).

Only the book side generates an entry, and even then not always. The service charge is the single book adjustment the example needs, because the mis-entered deposit had been recorded correctly in the monthly summary of cash receipts and only the checkbook was wrong (IRS Publication 583, Rev. December 2024). Nothing on the bank side is posted at all, because those items clear when the bank catches up.

Where a Bank Reconciliation Sits in a Firm’s Work

The cadence is monthly at a minimum. The checking account should be reconciled each month (IRS Publication 583, Rev. December 2024), and state auditor guidance for local governments sets the same floor while asking them to consider reconciling more often, daily in some cases, on accounts with a large amount of activity or a higher risk of fraud or invalid payments (Office of the Washington State Auditor, BARS GAAP Manual 3.1.9.15, Bank Reconciliations).

Who prepares it matters as much as how often. The same auditor’s best practice guidance says staff assigned to reconcile bank accounts should not have access to bank deposits, accounts payable or payroll checks, and should not be able to authorize electronic fund transfers or be a signer on the account. It also asks for an independent review of the reconciliation, documented by signature and date (Office of the Washington State Auditor, Best Practices for Bank Reconciliations, January 2020).

Open differences need a clock of their own. That same guidance asks for a policy setting a reasonable period, such as two weeks, to research and resolve discrepancies, and notes that many banks limit error resolution to 60 days after the transaction date (Office of the Washington State Auditor, Best Practices for Bank Reconciliations, January 2020). A difference nobody looks at inside that window can end up as the client’s loss rather than the bank’s.

The reconciliation is one step of a larger sequence, and where it falls in that sequence is set out in the month-end close checklist. It is also the test of the month’s bookkeeping, which is why an account that will not tie usually points back at how the entries were recorded rather than at the bank.

What It Is Not

Account Reconciliation

Account reconciliation is the general practice applied to any balance sheet account, and most of those accounts have no outside statement to tie to, so the balance has to be substantiated instead of matched, which is a different job and the subject of account reconciliation services.

Three-Way Reconciliation

Three-way reconciliation is the trust account variant, adding a third balance, the total of the individual client ledgers, to the ledger and bank balances a bank reconciliation already compares, and it is treated in full in law firm bookkeeping services.

Proof of Cash

A proof of cash, also called a four-column bank reconciliation, reconciles receipts and disbursements for the period as well as the opening and closing cash balances, where an ordinary bank reconciliation only reconciles cash at a single moment (Office of the Washington State Auditor, Best Practices for Bank Reconciliations, January 2020). Two mistakes that offset each other can leave the closing balance tying while the period’s receipts and disbursements are both wrong, and only a reconciliation that runs the activity will find them.

Common Questions

If your firm is closing more client books each month than your reviewers can get through, a trial task puts a block of your own reconciliation work through Accountably’s review chain so your reviewer grades real output first.