Bank Reconciliation, Step by Step: How to Agree Your Books to the Bank, With an Example
A bank reconciliation answers one question: does the bank balance in your books agree with the bank? If it does, every payment and receipt has been recorded once and only once. If it doesn't, something is missing, doubled or wrong, and the profit figures built on top of it can't be trusted either. It's the single most important check in bookkeeping, and the first thing an auditor looks at.
Why the two balances differ
Even when nothing is wrong, the statement and the ledger rarely show the same figure on the same day. The differences fall into three groups:
- Timing differences: in the books, not yet at the bank. A cheque you wrote that the supplier hasn't banked yet; a deposit made on the last day that the bank credits the next morning.
- Items not yet booked: at the bank, not yet in the books. Bank charges, interest, autopays and direct debits you only learn about from the statement.
- Errors: a payment booked twice, a wrong amount, a transaction posted to the wrong bank account, or occasionally a bank error.
Step by step
- Get the statement for the period, and the ledger for the same bank account to the same date. Reconcile each account, and each currency, separately.
- Check the starting point. Last period's reconciliation should have agreed; if it didn't, sort that out first.
- Tick off the matches: each line on the statement against the same amount in the ledger. Most lines match one to one.
- List what's left in the ledger but not on the statement. These are usually timing differences: unpresented payments and deposits in transit.
- List what's left on the statement but not in the ledger: charges, interest, autopays. These need booking, each with the statement as the document.
- Investigate anything else: duplicates, wrong amounts, items that don't belong to this account.
- Agree the two adjusted balances. When the adjusted bank balance equals the adjusted ledger balance, the account is reconciled. Keep the reconciliation with the statement.
A worked example
| Item | HK$ |
|---|---|
| Balance per bank statement | 125,400 |
| Less: cheque to a supplier, not yet presented | (12,000) |
| Add: deposit on 31 March, credited by the bank on 1 April | 4,500 |
| Adjusted bank balance | 117,900 |
| Item | HK$ |
|---|---|
| Balance per ledger | 118,900 |
| Less: bank charges, not yet booked | (150) |
| Less: electricity autopay, not yet booked | (1,250) |
| Add: interest received, not yet booked | 400 |
| Adjusted ledger balance | 117,900 |
Both sides come to HK$117,900, so the account is reconciled. The three items on the books side are then booked (bank charges, electricity, interest), and the ledger moves to HK$117,900. The two bank-side items stay on the reconciliation until they clear, and should appear on next month's statement. If they don't, find out why.
Common problems
- Old unpresented cheques. A cheque still outstanding after months may have been lost or never banked; follow it up rather than carrying it forever.
- Transfers between your own accounts booked on one side only. Each transfer has two legs, one in each account (see own-account transfers).
- Foreign-currency accounts reconciled in HKD instead of their own currency. Reconcile in the account's currency first; translation is a separate step (see multi-currency bookkeeping).
- A "difference" account that absorbs whatever doesn't agree. It hides errors instead of finding them.
- Reconciling only at the year end. Twelve months of differences take far longer to unpick than one.
How bank feeds change the job
With a daily feed, bank lines reach the books as they happen, so most of the matching is done as you go, and "items not yet booked" mostly disappear. The month-end reconciliation becomes a check: does the statement agree with what the feed booked? Banks without a feed are reconciled from the uploaded statement (see bookkeeping with a bank that has no feed and the daily HSBC feed).
How Certanta handles it
- Every bank and payment account reconciled to the statement, every month, in its own currency.
- Bank lines matched as they arrive, from daily feeds where available and monthly statements otherwise, with charges and interest booked from the statement.
- Own-account transfers matched leg to leg, so nothing is counted twice.
- No suspense dumping. Anything that doesn't match goes to your bookkeeper, or to your to-do list as a question.
- The reconciliations ready for your auditor, with every line traced to its statement.
Frequently asked questions
What is a bank reconciliation?
A check that the bank balance in your books agrees with the balance on the bank statement at the same date, after allowing for timing differences and for items on the statement that have not yet been booked.
How do you do a bank reconciliation?
Match each statement line to the ledger; list ledger items not yet on the statement (unpresented payments, deposits in transit) and statement items not yet in the ledger (charges, interest, autopays); investigate anything else; and agree the adjusted bank balance with the adjusted ledger balance.
What is an unpresented cheque?
A cheque you have issued and recorded in your books that the payee has not yet banked, so it is not yet on your bank statement. It is a timing difference on the reconciliation until it clears.
What is a deposit in transit?
Money you have recorded as received and paid in, which the bank has not yet credited, for example a deposit made on the last day of the month that appears on the next statement.
How often should I reconcile my bank accounts?
At least monthly, for every bank and payment account. Monthly reconciliation catches errors while they are still easy to trace; reconciling only at the year end means unpicking twelve months at once.
Do I still need to reconcile if I have a bank feed?
Yes, but it becomes a check rather than a chore: most lines are already matched as they arrive, and the month-end reconciliation confirms that the statement agrees with what the feed booked.
Every account reconciled, every month
Certanta matches bank lines as they arrive and agrees every account to the statement balance each month, so the year end starts from balances that are already proven.
Open the demo See pricingThis article is general information about bookkeeping, not accounting or audit advice for your company.