Learn how to reconcile a business bank account, identify differences between the bank statement and accounting records, and prepare an accurate bank reconciliation with a practical example.
What Is Bank Reconciliation?
Bank reconciliation is the process of comparing a business’s bank account records in its accounting system with the transactions and balance shown on the bank statement.
The purpose is to identify and explain differences, record missing transactions and confirm that the accounting records are complete and accurate.
Why Is Bank Reconciliation Important?
- Helps identify missing transactions
- Detects duplicate or incorrect entries
- Highlights unexpected bank charges
- Helps identify unusual or potentially fraudulent transactions
- Supports accurate financial reporting
- Helps confirm the bank balance in the general ledger
Businesses commonly perform bank reconciliations monthly, although more frequent reconciliation may be appropriate when transaction volumes are high.
Why Might the Balances Be Different?
1. Outstanding Payments
These are payments already recorded in the accounting records but not yet processed by the bank.
For example, a business issues a cheque for £400 that has not yet cleared.
2. Deposits in Transit
These are receipts recorded by the business but not yet credited to its bank statement.
For example, a business deposits £600 near the end of the reporting period.
3. Bank Charges
The bank may deduct fees that have not yet been recorded in the accounting system.
4. Direct Debits and Standing Orders
Automatic payments may appear on the bank statement before the bookkeeper records them.
5. Recording Errors
Errors may include incorrect amounts, duplicate entries, missing transactions or entries recorded in the wrong bank account.
Practical Bank Reconciliation Example
Imagine a UK small business preparing its bank reconciliation at 31 December.
The following balances and transactions have been identified:
| Item | Amount (£) |
|---|---|
| Balance per bank statement | 8,500 |
| Deposit in transit | 1,200 |
| Outstanding cheque | 700 |
| Unrecorded bank charges | 50 |
| Balance per cash book before adjustment | 9,050 |
Step 1: Adjust the Bank Statement Balance
Start with the bank statement balance: £8,500.
Add the deposit in transit: £1,200.
Deduct the outstanding cheque: £700.
Step 2: Adjust the Cash Book Balance
The cash book shows £9,050 before recording the bank charges.
The bank charges of £50 must be recorded in the accounting records.
| Account | Debit (£) | Credit (£) |
|---|---|---|
| Bank Charges Expense | 50 | – |
| Bank | – | 50 |
| Total | 50 | 50 |
The adjusted cash book balance is:
Step 3: Complete the Reconciliation
| Bank Reconciliation at 31 December | £ |
|---|---|
| Balance per bank statement | 8,500 |
| Add: Deposit in transit | 1,200 |
| Less: Outstanding cheque | (700) |
| Adjusted Bank Balance | 9,000 |
| Cash book before adjustment | 9,050 |
| Less: Bank charges | (50) |
| Adjusted Cash Book Balance | 9,000 |
| Unexplained Difference | 0 |
Which Items Need Journal Entries?
Not every difference requires a new journal entry.
| Item | Accounting Treatment |
|---|---|
| Deposit in transit | No additional entry if already correctly recorded |
| Outstanding cheque | No additional entry if already correctly recorded |
| Unrecorded bank charges | Record the missing expense and bank credit |
| Unrecorded direct debit | Record the payment against the appropriate account |
| Duplicate transaction | Investigate and correct the duplicate |
How to Perform a Bank Reconciliation
- Obtain the bank statement for the reporting period.
- Open the corresponding bank ledger or cash book.
- Compare transactions by date, amount and description.
- Identify unmatched receipts and payments.
- Investigate bank charges, interest and other missing entries.
- Record necessary corrections in the accounting system.
- List genuine timing differences.
- Confirm that adjusted balances agree.
- Review outstanding items in subsequent periods.
Bank Reconciliation in Xero, QuickBooks and Sage
Accounting software can simplify the reconciliation process by importing bank transactions and helping users match them with existing accounting records.
Xero
Xero provides bank reconciliation functionality that helps users match bank statement lines with transactions or create entries where appropriate.
QuickBooks
QuickBooks provides bank transaction matching and reconciliation features to help users compare their accounting records with bank statement information.
Sage
Sage accounting products provide bank transaction and reconciliation functionality, with features varying by product and subscription.
Common Bank Reconciliation Mistakes
- Recording the same bank transaction twice
- Creating a new transaction instead of matching an existing entry
- Ignoring outstanding cheques or deposits
- Posting bank transfers as income or expenses
- Failing to investigate unexplained differences
- Reversing legitimate transactions just to force a reconciliation
- Not reviewing old outstanding items
Test Your Knowledge
A business has the following bank reconciliation information:
- Bank statement balance: £6,000
- Deposit in transit: £900
- Outstanding payment: £400
What should the adjusted bank balance be?
Click to reveal the answer
Start with the bank statement balance of £6,000.
Add the deposit in transit of £900.
Deduct the outstanding payment of £400.
£6,000 + £900 − £400 = £6,500.
Learn Bank Reconciliation in Practice
Understanding bank reconciliation is essential for anyone planning to work as a bookkeeper.
Take the next step with our practical Xero, QuickBooks and Sage courses, covering real accounting software workflows.