Bank Reconciliation: Steps, Formula and a Worked Example

Your books say you have $24,127 in the bank. The bank statement says $27,395. Nothing is wrong, and neither number is a mistake. This gap is normal, and bank reconciliation is how you prove it.

Bank reconciliation is the process of comparing your internal cash records, the cash book, against the bank statement, then explaining every difference until the two agree.

Some items sit in your books but have not reached the bank yet, such as a cheque you posted last week. Others sit on the bank statement but not yet in your books, such as a service charge or interest.

Reconciliation lines them up, adjusts both sides, and confirms your cash balance is real.

It is one of the most important internal controls a business runs. It catches bank errors, your own recording errors, duplicate entries, and fraud such as unauthorised withdrawals.

This guide covers the two-column formula, the full step-by-step process, a complete worked example with journal entries, and what to do when the reconciliation stubbornly refuses to balance.

Key takeaways

• Bank reconciliation compares the cash book against the bank statement and explains every difference.
• The book balance and bank balance rarely match on their own, and that is expected, not an error.
• You adjust the bank side for items it has not processed, and adjust the book side for items you have not recorded.
• The reconciliation is complete when adjusted bank balance equals adjusted book balance.
• Only book-side items need journal entries; bank-side items clear on their own.

What is bank reconciliation?

Bank reconciliation verifies that the cash figure in your accounting records matches the cash the bank is actually holding, once timing and unrecorded items are accounted for. Your cash book is your internal record of every receipt and payment.

The bank statement is the bank's independent record. When both are adjusted for items the other has not yet captured, they must land on the same figure.

If they do not, you have an unexplained difference to investigate before you close the period. This makes bank reconciliation a core part of account reconciliation, the wider practice of tying your ledger to an independent source.

Bank reconciliation is simply the version that uses the bank statement as that source.

Why your book balance does not match the bank

The two balances drift apart for predictable reasons. Sorting each reconciling item onto the correct side is the whole skill. Items the bank has not yet processed adjust the bank balance.

Items you have not yet recorded adjust the book balance.

The single most common reconciling item is the outstanding cheque. The most common source of frustration is a transposition error, where you type $540 as $450 in your books.

How to do a bank reconciliation, step by step

Run the process the same way every period.

• Gather the documents. Pull the current bank statement and your cash book, and note the opening and closing balance on each.
• Check the opening balances match. This period's opening balance should equal last period's reconciled closing balance. If it does not, a prior reconciliation carried an error forward.
• Match transactions line by line. Tick every item that appears in both records. Whatever is left unticked on either side is a reconciling item.
• Adjust the bank balance. Add deposits in transit, subtract outstanding cheques, and correct any bank error.
• Adjust the book balance. Add interest and collections, subtract service charges and NSF cheques, and correct any recording error.
• Confirm both sides agree, then post. The adjusted bank balance must equal the adjusted book balance. Record journal entries for the book-side items only.

A worked example

Here is a full reconciliation for the month, laid out as both sides converging on one figure.

You start with a balance per bank statement of $27,395 and a balance per books of $24,127. You find these reconciling items:

• A deposit of $6,700 was recorded in your books on 31 March but has not appeared on the statement (deposit in transit).
• Cheques totalling $7,350 were issued but have not cleared (outstanding cheques).
• The bank collected a note on your behalf for $3,000 and credited $3 of interest.
• The bank charged a $5 service fee and returned an NSF cheque for $350.
• Cheque #2005, written for $360, was recorded in your books as $330, a $30 understatement.

Both sides land on $26,745, so the account is reconciled. Note that the raw balances were never meant to match; only the adjusted figures do.

The book-side items then need journal entries. For example, the collected note and interest increase cash, while the service charge, NSF cheque and cheque error reduce it:

`Dr Cash $2,618 | Cr Notes Receivable $3,000, Cr Interest Income $3 | Dr Bank Charges $5, Dr Accounts Receivable $350, Dr Accounts Payable $30`

The bank-side items, the deposit in transit and the outstanding cheques, need no entry. They clear on their own as the bank processes them next period.

When it will not balance

A reconciliation that is off by a small amount is almost always one of a few things. Work through them in order.

• Divide the difference by 9. If it divides evenly, you likely have a transposition error, such as $540 entered as $450. The difference, $90, divides by 9.
• Search for a single transaction equal to the difference. An entry you missed or entered once too often will match the gap exactly.
• Check for a doubled or missing entry. A payment recorded twice, or a deposit not recorded at all, is a frequent culprit.
• Confirm the opening balance. If the beginning balance was wrong, the error was carried in from a prior period and this month will never tie until you fix it.

Bank reconciliation vs other reconciliations

Bank reconciliation is often confused with its neighbours because they all involve matching records. Each ties a different pair together.

Bank reconciliation deals only with cash and the bank.

It is not the same as accounts receivable reconciliation, which proves what customers owe, or vendor reconciliation, which checks what you owe suppliers, though a break in one often shows up in another.

A payment reconciliation gap frequently surfaces here first. Upstream, clean invoice reconciliation keeps the cash entries accurate in the first place.

Reconciling a foreign-currency bank account

If you receive payments from overseas, bank reconciliation gains an extra layer.

The amount that lands in your account depends on the exchange rate the bank applied on the settlement date, which rarely equals the rate you booked the receivable at.

That difference is a realised foreign-exchange gain or loss, and it becomes a reconciling item on top of the usual timing differences.

Intermediary and correspondent-bank fees deducted in transit make the landed amount smaller still, and they are often invisible until the statement arrives.

A purpose-built receiving layer removes most of this guesswork.

Xflow gives exporters a receiving account that converts incoming foreign payments at live mid-market rates, so the FX applied is transparent rather than buried in a marked-up bank rate, and it issues the electronic Foreign Inward Remittance Advice, or eFIRA, automatically as proof of receipt.

Paired with Xflow Invoicing, the receipt arrives already tied to the invoice it settles, so the cash entry is clean before it reaches your books.

Xflow holds final Payment Aggregator - Cross Border (PA-CB) authorisation from the Reserve Bank of India (RBI) for both exports and imports, as of February 2026.

Best practices

• Reconcile monthly at least, weekly if volumes are high. Frequent reconciliation keeps differences small and easy to trace.
• Reconcile before you close. Never finalise a period on an unexplained difference.
• Investigate every reconciling item. A recurring unexplained charge can be a bank error or a fraud signal.
• Keep a clear audit trail. Attach the statement and the reconciliation so a reviewer, or an auditor, can follow it.
• Fix opening-balance errors immediately. A carried-forward error compounds every month it survives.

The bottom line

Bank reconciliation is not about making two numbers match. It is about explaining why they differ, adjusting each side for the items the other has not caught, and confirming the adjusted balances agree.

Sort each reconciling item onto the right side, post journal entries for the book-side items only, and never close on an unexplained gap.

For foreign-currency accounts, the FX difference is the extra item to watch, and it is the part worth making transparent from the start.

Frequently asked questions