Bank reconciliation step by step, with a worked example
Reconcile a bank statement to the cash book step by step, with the two-sided format, a worked example that ties to zero and the journal entries it needs.
A bank reconciliation shows that the cash balance in your books and the balance on the bank statement agree, once timing differences and errors are accounted for. You adjust each balance for the items that appear on only one side. The two adjusted figures must then be equal. If they are not, a difference remains, and it has to be explained before the books are closed.
This article covers why the reconciliation matters, the two-sided format, which item goes on which side, a complete example that ties to zero, the journal entries it requires, and how to track down a difference that will not clear.
Why should you do a bank reconciliation?
The bank and the books record the same cash from different points of view and at different times. A check written on the last day of the month may not clear until the next one. A bank fee appears only on the statement, and a customer's check may bounce after it was recorded. A reconciliation finds those items and also catches errors on either side, such as a transposed amount or a duplicated entry. It is also a basic control. The person who handles cash should not be the only person who reconciles it, so that one individual cannot record a payment, conceal it and close the books unnoticed.
What is the two-sided format for a bank reconciliation?
Work each side separately, then compare the results:
- Bank side: start with the balance on the bank statement. Add deposits in transit. Subtract outstanding checks. Correct any bank error in the direction it needs.
- Book side: start with the cash balance in your books. Add items the bank has credited that the books have not recorded, such as interest. Subtract items the bank has debited that the books have not recorded, such as fees and returned checks. Correct any error made in the books.
Adjusted bank balance = adjusted book balance. That equality is the test. The table shows which side each common item belongs on.
| Item | Side | Direction | Reason |
|---|---|---|---|
| Deposit in transit | Bank | Add | Recorded in the books; the bank has not credited it yet |
| Outstanding check | Bank | Subtract | Recorded in the books; the bank has not paid it yet |
| Bank error | Bank | Correct | The bank must fix its own records |
| Interest earned | Book | Add | The bank credited it; the books have not recorded it |
| Note collected by the bank | Book | Add | The bank collected it for you; the books have not recorded it |
| Service fee | Book | Subtract | The bank charged it; the books have not recorded it |
| NSF (not sufficient funds) check | Book | Subtract | A customer's check bounced, so the cash was never kept |
| Your own recording error | Book | Correct | Fix the books |
The rule for errors is simple: an error goes on the side that made it.
What does a worked bank reconciliation look like?
These month-end figures are illustrative.
- Balance per bank statement: 12,480.55
- Balance per books: 12,120.67
- A deposit of 1,850.00 recorded in the books on the last day, not yet credited by the bank
- Three checks written but not yet paid: 620.35, 1,240.00 and 415.75
- A bank error: the bank charged 250.00 to this account for a check drawn on another customer's account
- Interest of 12.18 credited by the bank and a note of 500.00 collected by the bank, neither recorded in the books
- A service fee of 35.00 charged by the bank and not yet recorded
- A customer check for 275.40 returned NSF and not yet recorded
- A check to a supplier for 486.00 recorded in the books as 468.00, with the digits transposed
The reconciliation:
| Bank side | Amount | Book side | Amount |
|---|---|---|---|
| Balance per bank statement | 12,480.55 | Balance per books | 12,120.67 |
| Add: deposit in transit | 1,850.00 | Add: interest credited by bank | 12.18 |
| Less: outstanding checks (620.35 + 1,240.00 + 415.75) | (2,276.10) | Add: note collected by bank | 500.00 |
| Add: bank error, check charged in error | 250.00 | Less: bank service fee | (35.00) |
| Less: NSF check returned | (275.40) | ||
| Less: transposed check (486.00 recorded as 468.00) | (18.00) | ||
| Adjusted bank balance | 12,304.45 | Adjusted book balance | 12,304.45 |
The difference is 0.00. The bank side works out as 12,480.55 + 1,850.00 − 2,276.10 + 250.00 = 12,304.45, and the book side as 12,120.67 + 12.18 + 500.00 − 35.00 − 275.40 − 18.00 = 12,304.45.
Which journal entries come out of a bank reconciliation?
Only the book-side items need entries. The deposit in transit and the outstanding checks are already in the books. The bank corrects its own error, so your books do not change for it.
| Entry | Debit | Credit | Amount |
|---|---|---|---|
| Interest earned | Cash | Interest income | 12.18 |
| Note collected by the bank | Cash | Notes receivable | 500.00 |
| Bank service fee | Bank service charges | Cash | 35.00 |
| NSF check returned | Accounts receivable | Cash | 275.40 |
| Correct the transposed check | Accounts payable | Cash | 18.00 |
The note entry assumes the 500.00 is principal only. Any interest collected with it goes to interest income. The correction debits accounts payable by 18.00 because the payment was posted for 468.00 and actually cleared for 486.00.
The five entries change the cash balance by 12.18 + 500.00 − 35.00 − 275.40 − 18.00 = 183.78. That is the gap between the book balance and the adjusted book balance. For the bank error, ask the bank to reverse the 250.00 charge and send a corrected statement.
How do you find the cause of a bank reconciliation difference?
When the adjusted balances do not match, the size of the difference often points to the cause:
- Divisible by 9. Swapping two digits always produces a difference divisible by 9. The transposition in the example shows as 18.00 (486.00 − 468.00), and 18 is 2 × 9. Scan recorded checks and deposits for swapped digits.
- Equal to one item. The item is on one side only. A difference of 1,850.00 would mean the deposit in transit was left off the bank side.
- Equal to twice one item. The item was added when it should have been subtracted, or the reverse. For the NSF check, the difference would be 550.80, which is 2 × 275.40.
- Old outstanding items. A check that stays outstanding for several months should be investigated. It may have been lost or never received by the payee.
- Arithmetic. Re-add the cash ledger and recheck every running balance and total on the statement. Addition errors and balances carried forward incorrectly are common causes, and they are quick to check.
How should a bank reconciliation be documented and reviewed?
Keep each reconciliation with the bank statement, the list of outstanding items and the journal entries it produced. Record who prepared it and when, and have a second person review it and sign it off. The reviewer checks the statement balance, compares the outstanding checks with the check register, and confirms that each journal entry matches a book-side item. Items that stay outstanding for more than one period should be listed with the reason they have not cleared.
How often should you reconcile a bank account?
Reconcile each bank and card account at least monthly, when the statement arrives. Accounts with many transactions are usually reconciled more often. A short cycle keeps each difference small enough to trace while the transactions are still fresh.
Use the statement's closing date as the cutoff. Items recorded in the books after that date belong to the next period and stay out of this reconciliation. Items recorded before the cutoff that the bank has not yet posted are the deposits in transit and outstanding checks described above.
How do you set up a bank reconciliation in a spreadsheet?
Use one column for the amounts, with the bank items in the upper block and the book items in the lower block. Put the three outstanding checks in D1:D3 and sum them. Then:
- Outstanding checks,
B3:=SUM(D1:D3) - Adjusted bank balance,
B5:=B1+B2-B3+B4, where B1 is the bank balance, B2 the deposit in transit and B4 the bank error - Adjusted book balance,
B12:=B6+B7+B8-B9-B10-B11, where B6 is the book balance, B7 the interest, B8 the note collected, B9 the fee, B10 the NSF check and B11 the transposition correction - Difference,
B13:=ROUND(B5-B12,2), which should show 0.00
Wrapping the difference in ROUND stops floating-point noise from showing a small false difference. The bank reconciliation sheet follows this two-sided layout. When a returned check goes back on a customer's account, the accounts receivable aging shows what that customer still owes.
For a short definition of the reconciliation, see what is a bank reconciliation.