10 Step Bank Reconciliation
A bank reconciliation is the process of comparing your company’s cash records (the book balance in your general ledger) with the bank’s records (the ending balance on the bank statement) for the same date. Its goal is to identify and explain differences so you can confirm the true cash position. Differences are typically caused by timing items (such as outstanding checks and deposits in transit), bank activity not yet recorded in your books (like service fees, interest earned, and NSF/returned items), and errors made by either the bank or your company (such as transposed numbers, duplicate entries, or missed transactions). The reconciliation results in an adjusted bank balance and an adjusted book balance that should match, and it provides the basis for any necessary journal entries to update your accounting records.
- Gather the bank statement for the period (and any separate credit card/merchant statements if applicable).
- Pull your cash account activity from the general ledger (GL) for the same period.
- Collect supporting documents: check register, deposit slips, remittance details, bank advices, and prior reconciliation.
- Verify basic details (period, account, balances). Confirm you’re reconciling the correct bank account, statement period, beginning balance, and ending balance. Confirm your GL cash account beginning balance matches the prior reconciliation’s ending book balance.
- Mark cleared transactions on the bank statement. Compare the bank statement to your cash receipts and disbursements listing. Tick/mark items that appear in both the bank and the books (checks, deposits, transfers, EFTs).
- Identify deposits in transit. List deposits recorded in your books that do not appear on the bank statement by the cutoff date (often late-day or end-of-month deposits). These will be added to the bank balance on the reconciliation.
- Identify outstanding (uncleared) checks and payments. List checks, ACH payments, wires, or bill payments recorded in your books but not yet cleared by the bank. These will be deducted from the bank balance on the reconciliation.
- Review bank-only items (service charges, interest, fees). Identify items on the bank statement not recorded in the books—such as monthly service charges, wire fees, returned check fees, interest income, or rewards. These require journal entries in your books.
- Check for NSF/returned items and chargebacks. If a customer payment was returned (NSF) or a card payment was charged back, the bank will reduce your balance. Ensure you reverse the original receipt (or record a receivable) and record any related fees.
- Investigate bank errors and book errors. Look for duplicates, transposed numbers, or mispostings (wrong amount, wrong date, wrong account). If the bank made an error, contact the bank. If your books contain an error, correct it with adjusting entries.
- Prepare the reconciliation (bank side and book side). Start with the bank statement ending balance and adjust for deposits in transit and outstanding checks to arrive at the adjusted bank balance. Separately, start with the book balance and adjust for bank-only items and book errors to arrive at the adjusted book balance.
- Record adjusting journal entries in the GL. Post entries for bank fees, interest, NSF items, and any corrections needed in your accounting records. Ensure entries are dated within the appropriate period per your close policy.
- Confirm the adjusted balances match and finalize documentation. The adjusted bank balance must equal the adjusted book balance. Save the reconciliation, supporting schedules (outstanding checks, deposits in transit), and evidence of review/approval. Carry forward outstanding items to next period and monitor long-outstanding checks or unusual reconciling items.
Bank statement ending balance: $________
Add: Deposits in transit: $________
Less: Outstanding checks/payments: ($________)
Adjusted bank balance: $________
Book (GL) cash balance: $________
Add: Interest/credits not yet recorded: $________
Less: Bank fees/NSF/charges: ($________)
+/-: Book error corrections: $________
Adjusted book balance: $________
Adjusted bank balance should equal adjusted book balance.Which item is typically deducted from the bank statement balance to reach the adjusted bank balance?
Result: A completed bank reconciliation provides confidence that the cash account is accurate, helps detect errors or fraud, and ensures clean month-end financial reporting.