Bank Reconciliation: Steps and Common Adjustments

The bank reconciliation steps form the accounting process by which a company compares its internal cash book balance to the bank statement and adjusts for differences. Timing gaps—such as outstanding checks and deposits in transit—create temporary discrepancies that must be systematically identified and either recorded or explained.

Why bank reconciliation matters

A company keeps a cash book (ledger of payments and receipts) and receives a monthly bank statement from its financial institution. These two records are almost never identical at any given moment—not because one is wrong, but because of timing differences.

When a company writes a check, it records the payment immediately in its books, but the bank does not deduct the amount until the check clears. When the company deposits cash, it records the receipt immediately, but the bank may not credit it until the next business day. The bank also charges fees, levies interest, or processes automatic transfers that the company must recognize.

Bank reconciliation serves three critical purposes:

1. Error detection. It catches mistakes by the company (recording wrong amounts) or the bank (wrong posting, duplicate charge, or unauthorized debit).
2. Cash position clarity. The company knows how much cash is actually available, not just what the checkbook says.
3. Internal control. Regular reconciliation discourages fraud by requiring frequent verification of balances and transactions.

The basic reconciliation framework

The reconciliation has two parallel tracks: one starting from the bank statement, one from the cash book. Both converge at a single true cash position.

Bank statement side:

• Start with the bank statement ending balance
• Add deposits not yet recorded by the bank (deposits in transit)
• Subtract checks issued but not yet cashed (outstanding checks)
• Adjust for bank errors (if any)
• Arrive at the true cash balance

Cash book side:

• Start with the cash book (general ledger) ending balance
• Add bank credits not yet recorded in the books (interest, transfers in)
• Subtract bank charges not yet recorded in the books (fees, overdraft interest)
• Adjust for company errors (if any)
• Arrive at the same true cash balance

If both sides reconcile to the same amount, the monthly close is locked. If they do not, the discrepancy must be investigated.

Step-by-step reconciliation process

Step 1: Obtain and review the bank statement. Collect the official statement for the period (e.g., the month of June). Note the opening balance, closing balance, all deposits, all checks cleared, and any bank charges or credits.

Step 2: Compare deposits. List all deposits in the cash book and verify that they appear on the bank statement. Any deposit recorded in the book but not yet on the statement is a deposit in transit. Add this amount to the bank statement balance during reconciliation.

Step 3: Compare checks. List all checks written in the cash book and verify they appear on the bank statement. Checks written but not yet cleared are outstanding checks. Subtract this amount from the bank statement balance.

Step 4: Identify bank fees and charges. The bank statement often shows service charges, overdraft fees, wire-transfer fees, or insufficient-funds charges. These are deducted by the bank and must be subtracted from the cash book balance (because the company hasn’t yet recorded them in the books).

Step 5: Account for interest and transfers. Banks may credit interest on savings balances or transfer funds automatically (e.g., for loan payments). These are added to the cash book balance if not yet recorded.

Step 6: Investigate errors. Any remaining discrepancy warrants investigation. This could signal:

• A transposition error (writing 63 instead of 36 in the cash book)
• A bank error (incorrect posting, duplicate charge)
• A missing or misdated transaction
• A timing issue the accountant missed

Step 7: Make journal entries. Any difference between the two sides that stems from a company error or unrecorded bank activity must be journalized. For example:

• Bank charges of $50 not yet recorded: Debit Bank Charges Expense, Credit Cash $50
• Interest earned of $100 not yet recorded: Debit Cash, Credit Interest Income $100

Step 8: Verify the reconciliation. Once all adjustments are made, both the bank statement side and the cash book side should equal the same true cash balance. This amount is posted to the balance sheet.

Common reconciling items

Real-world example

Suppose the cash book shows a closing balance of $50,000 and the bank statement shows $52,000. Reconciliation reveals:

• Outstanding checks totaling $4,000 (not yet cleared)
• Deposit in transit of $1,500 (not yet posted by bank)
• Bank service charges of $500 (not yet recorded in books)

Bank statement side:

• Start: $52,000
• Add deposit in transit: $1,500
• Subtract outstanding checks: ($4,000)
• Equals true cash: $49,500

Cash book side:

• Start: $50,000
• Subtract bank charges: ($500)
• Equals true cash: $49,500

Both sides reconcile. The company records the $500 bank-charge adjustment, and the balance sheet reports $49,500 as cash on hand.

Internal controls and best practices

Strong reconciliation procedures reduce fraud and error:

• Segregation of duties. The person reconciling should not be the person writing checks or recording transactions.
• Timeliness. Reconcile monthly, before finalizing the financial statements.
• Documentation. Keep reconciliation working papers showing all adjustments and authorizations.
• Review and approval. A manager independent of transaction recording should review and sign off on the reconciliation.
• Investigation protocol. Establish a rule that discrepancies above a threshold (e.g., $1,000) trigger immediate investigation.

See also