Bank Reconciliation

What is a Bank Reconciliation?

A bank reconciliation or bank rec is a report used to check and explain the differences between the cash balance in a company’s accounting ledger and the bank statement balance. A bank reconciliation is also one of the main ways to prevent fraud and embezzlement of company funds.

In accounting, a company’s cash includes the money in its checking account(s). To safeguard this critical and tempting asset, a company should establish internal controls over its cash. These controls include separating the accounting duties of its employees, depositing all receipts into the company’s checking account, paying all bills through the checking account, and having an independent person routinely prepare a bank reconciliation (bank rec, bank statement reconciliation), and more.

In bookkeeping, a bank reconciliation is the process by which the bank account balance in an entity’s books of account is reconciled to the balance reported by the financial institution in the most recent bank statement. Any difference between the two figures needs to be examined and, if appropriate, rectified.

Bank statements are commonly routinely produced by the financial institution and used by account holders to perform their bank reconciliations. To assist in reconciliations, many financial institutions now also offer direct downloads of financial transaction information into the account holders accounting software, typically using the .csv file format.

Differences between an entity’s books of account and the bank’s records may arise, for example, because:

  • cheques issued by the entity have not been presented to the bank or the bank has dishonoured a cheque,
  • a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the entity’s books, or
  • either the bank or the entity itself has made an error.

Sometimes it may be easy to reconcile the difference by looking at the transactions in the bank statement since the last reconciliation and the entity’s own accounting records (cash book) to see if some combination of them tally with the difference to be explained. Otherwise it may be necessary to go through and match every transaction in both sets of records since the last reconciliation, and identify which transactions remain unmatched. The necessary adjustments should then be made in the cash book, or reported to the bank if necessary, or any timing differences recorded to assist with future reconciliations.

For this reason, and to minimise the amount of work involved, it is good practice to carry out reconciliations at reasonably frequent intervals.

Bank Reconciliation Terminology

The key terms to be aware of when dealing with a bank reconciliation are:

  • Deposit in transit. Cash and/or checks that have been received and recorded by an entity, but which have not yet been recorded in the records of the bank where the entity deposits the funds. If this occurs at month-end, the deposit will not appear in the bank statement, and so becomes a reconciling item in the bank reconciliation. A deposit in transit occurs when a deposit arrives at the bank too late for it to be recorded that day, or if the entity mails the deposit to the bank (in which case a mail float of several days can cause a delay), or the entity has not yet sent the deposit to the bank at all.
  • Outstanding check. A check payment that has been recorded by the issuing entity, but which has not yet cleared its bank account as a deduction from cash. If it has not yet cleared the bank by the end of the month, it does not appear on the month-end bank statement, and so is a reconciling item in the month-end bank reconciliation.
  • NSF check. A check that was not honored by the bank of the entity issuing the check, on the grounds that the entity’s bank account does not contain sufficient funds. NSF is an acronym for “not sufficient funds.” The entity attempting to cash an NSF check may be charged a processing fee by its bank. The entity issuing an NSF check will certainly be charged a fee by its bank.

Bank Reconciliation Procedure

The following bank reconciliation procedure assumes that you are creating the bank reconciliation in an accounting software package, which makes the reconciliation process easier:

  1. Enter the bank reconciliation software module. A listing of uncleared checks and uncleared deposits will appear.
  2. Check off in the bank reconciliation module all checks that are listed on the bank statement as having cleared the bank.
  3. Check off in the bank reconciliation module all deposits that are listed on the bank statement as having cleared the bank.
  4. Enter as expenses all bank charges appearing on the bank statement, and which have not already been recorded in the company’s records.
  5. Enter the ending balance on the bank statement. If the book and bank balances match, then post all changes recorded in the bank reconciliation and close the module. If the balances do not match, then continue reviewing the bank reconciliation for additional reconciling items. Look for the following items:
    • Checks recorded in the bank records at a different amount from what is recorded in the company’s records.
    • Deposits recorded in the bank records at a different amount from what is recorded in the company’s records.
    • Checks recorded in the bank records that are not recorded at all in the company’s records.
    • Deposits recorded in the bank records that are not recorded at all in the company’s records.
    • Inbound wire transfers from which a lifting fee has been extracted.


XYZ Company is closing its books and must prepare a bank reconciliation for the following items:

  • Bank statement contains an ending balance of $300,000 on February 28, 2018, whereas the company’s ledger shows an ending balance of $260,900
  • Bank statement contains a $100 service charge for operating the account
  • Bank statement contains interest income of $20
  • XYZ issued checks of $50,000 that have not yet been cleared by the bank
  • XYZ deposited $20,000 but this did not appear on the bank statement
  • A check for the amount of $470 issued to the office supplier was misreported in the cash payments journal as $370.
  • A note receivable of $9,800 was collected by the bank.
  • A check of $520 deposited by the company has been charged back as NSF.
AmountAdjustment to Books
Ending Bank Balance$300,000
Deduct: Uncleared cheques– $50,000None
Add: Deposit in transit+ $20,000None
Adjusted Bank Balance$270,000
Ending Book Balance$260,900
Deduct: Service charge– $100Debit expense, credit cash
Add: Interest income+ $20Debit cash, credit interest income
Deduct: Error on check– $100Debit expense, credit cash
Add: Note receivable+ $9,800Debit cash, credit notes receivable
Deduct: NSF check– $520Debt accounts receivable, credit cash
Adjusted Book Balance$270,000

Bank Reconciliation Problems

There are several problems that continually arise as part of the bank reconciliation, and which you should be aware of. They are:

  • Uncleared checks that continue to not be presented. There will be a residual number of checks that either are not presented to the bank for payment for a long time, or which are never presented for payment. In the short term, you should treat them in the same manner as any other uncleared checks – just keep them in the uncleared checks listing in your accounting software, so they will be an ongoing reconciling item. In the long term, you should contact the payee to see if they ever received the check; you will likely need to void the old check and issue them a new one.
  • Checks clear the bank after having been voided. As noted in the preceding special issue, if a check remains uncleared for a long time, you will probably void the old check and issue a replacement check. But what if the payee then cashes the original check? If you voided it with the bank, the bank should reject the check when it is presented. If you did not void it with the bank, then you must record the check with a credit to the cash account and a debit to indicate the reason for the payment (such as an expense account, or an increase in a cash account or decrease in a liability account). If the payee has not yet cashed the replacement check, you should void it with the bank at once to avoid a double payment. Otherwise, you will need to pursue repayment of the second check with the payee.
  • Deposited checks are returned. There are cases where the bank will refuse to deposit a check, usually because it is drawn on a bank account located in another country. In this case, you must reverse the original entry related to that deposit, which will be a credit to the cash account to reduce the cash balance, with a corresponding debit (increase) in the accounts receivable account.

Another possibility that may be causing problems is that the dates covered by the bank statement have changed, so that some items are included or excluded. This situation should only arise if someone at the company requested the bank to alter the closing date for the company’s bank account.

Bank Reconciliation Statement

A bank reconciliation statement is a statement prepared by the entity as part of the reconciliation process which sets out the entries which have caused the difference between the two balances. It would, for example, list outstanding cheques (ie., issued cheques that have still not been presented at the bank for payment).

The entries in the entity’s books to rectify the discovered discrepancies (except for the outstanding cheques) would typically be made in a subsequent date or period, not backdated. When cheques become stale (ie., out of date), they would typically be reversed, not cancelled.

Bank reconciliation statements ensure payments have been processed and cash collections have been deposited into the bank. The reconciliation statement helps identify differences between the bank balance and book balance, in order to process necessary adjustments or corrections. An accountant typically processes reconciliation statements once a month.

What Is the Purpose of Bank Reconciliation?

The bank reconciliation process offers several advantages including:

  • Detecting errors such as double payments, missed payments, calculation errors etc.
  • Tracking and adding bank fees and penalties in the books
  • Spot fraudulent transactions and theft
  • Keeping track of accounts payable and receivables of the business

Bank reconciliation done through accounting software is easier and error-free. The bank transactions are imported automatically allowing you to match and categorize a large number of transactions at the click of a button. This makes the bank reconciliation process efficient and controllable.