What is a bank reconciliation?
Short answer
A bank reconciliation compares the cash balance in your books with the bank statement balance, adjusted for items that appear on only one side, such as deposits in transit, outstanding checks, fees and errors. When the two adjusted balances agree, the cash records are confirmed. Any remaining difference must be explained before the period is closed.
A bank reconciliation checks that the cash in your books and the cash at the bank agree once timing differences and errors are accounted for. Each balance is adjusted for the items the other side does not yet show, and the two adjusted figures must match.
Why do I need to do a bank reconciliation?
Cash moves through the bank and the books at different times. A check written near month-end may not clear until the next month. A bank fee or interest payment may appear only on the statement. Without a reconciliation, those items sit unexplained, and a missing or duplicated entry can go unnoticed for months.
What adjustments go on the bank side and the book side?
- Bank side: start with the statement balance, add deposits in transit, subtract outstanding checks, and correct any bank error.
- Book side: start with the cash balance in the books, add items the bank credited but the books have not recorded (such as interest), subtract items the bank debited (such as fees and returned checks), and correct any error in the books.
Each error goes on the side that made it. Journal entries are needed only for the book-side items, because the bank side is corrected by the bank or already recorded in the books.
How do the bank and book balances match in an example?
These month-end figures are illustrative:
- Balance per bank statement: 5,000.00
- Deposit in transit, recorded in the books but not yet credited by the bank: 800.00
- Outstanding check, written but not yet paid: 350.00
- Balance per books: 5,470.50
- Interest credited by the bank, not yet in the books: 4.50
- Bank service fee, not yet in the books: 25.00
The bank side is 5,000.00 + 800.00 − 350.00 = 5,450.00. The book side is 5,470.50 + 4.50 − 25.00 = 5,450.00. The two agree, so the difference is 0.00 and the cash balance is confirmed for the period.
Two journal entries record the book-side items:
| Entry | Debit | Credit | Amount |
|---|---|---|---|
| Interest earned | Cash | Interest income | 4.50 |
| Bank service fee | Bank service charges | Cash | 25.00 |
After these entries the cash balance is 5,470.50 + 4.50 − 25.00 = 5,450.00, the same as the adjusted bank balance. The deposit in transit and the outstanding check need no entries, because the books already hold them.
If the two sides had not agreed, the size of the difference would point to the cause. A difference of 800.00 would mean the deposit in transit was left off the bank side. A difference of 700.00, which is twice 350.00, would mean the check was added when it should have been subtracted. The full guide covers how to trace differences and the transposition rule.
How do I set up a bank reconciliation in a spreadsheet?
Enter the bank balance in B2, the deposit in transit in B3 and the outstanding check in B4. Enter the book balance in B6, the interest in B7 and the fee in B8. Then:
- Adjusted bank balance,
B5:=B2+B3-B4 - Adjusted book balance,
B9:=B6+B7-B8 - Difference,
B10:=ROUND(B5-B9,2), which should show 0.00
With the example figures, B5 and B9 both return 5,450.00. Add a row for each new item and extend the sums. The bank reconciliation sheet uses this two-sided layout.