What is a bank reconciliation? Definition, formula, and the items on each side

The definition in plain terms

Your bank and your books record the same money, but not at the same moment. You write a check today and the bank pays it when the payee deposits it. The bank deducts a monthly fee and you only learn about it from the statement. On any given date the two balances usually differ.

A bank reconciliation is the schedule that explains that difference. The OpenStax accounting textbook calls it the internal report that explains and documents any differences between the bank balance and the company balance, prepared by the company that owns the account. The Utah Office of the State Auditor adds a useful condition: the reconciliation is not complete until every item that affected the bank account is recorded in the accounting records and the outstanding items are totaled to show the true cash available.

Two related terms: a bank reconciliation statement is the finished document, and reconciling is the process of producing it. The words are often used interchangeably.

Why it matters

The Washington State Auditor’s cash manual describes bank reconciliations as a necessary control to safeguard cash against fraud and losses and to keep accounting records accurate. In practice a reconciliation does four jobs.

• Catches errors: a check entered as 45.00 that cleared for 54.00, a deposit posted twice, a payment the bank charged to the wrong account.
• Surfaces fraud early: a payment you did not authorize, a check payee that differs from your register, or a check that never appears in your books.
• Records bank-only items: service fees, interest, returned customer checks and automatic debits do not reach your books until you read the statement.
• Keeps the cash figure honest: the adjusted balance is the cash you actually have once uncleared items settle, which is the number to plan against.

Bank side versus book side

Every reconciliation has two columns. The bank side starts with the ending balance on the statement and adjusts for things you know about that the bank has not processed yet. The book side starts with the cash balance in your ledger or check register on the same date and adjusts for things the bank processed that you have not recorded yet.

The test for which side an item belongs on is simple: ask who has not recorded it. If the bank has not recorded it, it goes on the bank side. If you have not recorded it, it goes on the book side. Only book side items lead to journal entries, because the bank will record its own timing items when they clear.

• Bank side, add: deposits in transit (recorded in your books, not yet on the statement).
• Bank side, subtract: outstanding checks and payments (recorded in your books, not yet cleared).
• Bank side, add or subtract: bank errors, such as another customer’s check charged to your account. Report these to the bank.
• Book side, add: interest earned, collections the bank made for you, electronic deposits you had not recorded.
• Book side, subtract: service fees, returned (NSF) customer checks, automatic payments you had not recorded.
• Book side, add or subtract: your own posting errors, such as a transposed amount.

The bank reconciliation formula

Both sides end at an adjusted balance. When the work is right, the two adjusted balances are equal and the difference is 0.00.

• Adjusted bank balance = statement ending balance + deposits in transit − outstanding checks ± bank errors
• Adjusted book balance = book balance + interest and collections − fees, NSF items and unrecorded payments ± book errors
• Difference = adjusted bank balance − adjusted book balance, which should be 0.00

A short worked example

This example is fictional. Maple Street Bakery’s October statement ends at 6,240.00 and its ledger shows 6,137.00 on October 31.

Bank side: an 850.00 deposit made on October 31 is not on the statement, check 2207 for 1,130.00 has not cleared, and the bank charged a 60.00 withdrawal that belongs to another customer. Adjusted bank balance: 6,240.00 + 850.00 − 1,130.00 + 60.00 = 6,020.00.

Book side: the bank paid 3.00 of interest, charged a 15.00 service fee and returned a customer’s 96.00 check unpaid, and the bakery entered a 54.00 check as 45.00, so its books are 9.00 too high. Adjusted book balance: 6,137.00 + 3.00 − 15.00 − 96.00 − 9.00 = 6,020.00. The difference is 0.00. The bakery posts four journal entries for the book side items and asks the bank to reverse the 60.00.

How often to reconcile, and who should do it

Monthly, when each statement arrives, is the usual rhythm. The Washington State Auditor requires the local governments it audits to document a reconciliation of both ending balances and cash activity at least monthly, and suggests more frequent, even daily, reconciliation for busy accounts or accounts at higher risk of fraud. A business with heavy card or transfer volume can reconcile weekly against online activity and still do the formal month-end version.

Separate the duties where you can. Utah’s state auditor advises that the person who reconciles the account should not be the same person who receives cash and makes payments, and that a reviewer should sign and date the reconciliation, check that its dates match the statement, look for old outstanding items and question any unusual payment. In a one-person business, an owner reading the finished reconciliation each month is a reasonable substitute.

What a difference of 0.00 proves, and what it does not

A zero difference proves that every gap between the two balances on that date is explained by items you listed. It confirms the bank statement and the cash account agree once timing items settle.

It does not prove that every transaction was recorded in the right expense or income account, that every payment was authorized, or that your outstanding items are real. Two offsetting mistakes can also produce 0.00. That is why reviewers read the cleared items, look at the payees, and chase any outstanding check or deposit in transit that is more than a month old. An outstanding check that never clears may be a lost check, or a sign that the entry was never a real payment.

Where to go from here

This page explains the concept. For the procedure, follow the step-by-step guide to reconciling a bank statement, then practice with the solved examples and the journal entries guide. If your bank only gives you the statement as a PDF, Fulla Ledger can turn it into rows you check against the source page and export to Excel or CSV, so the matching happens in a spreadsheet instead of on paper.