Accounting · Cash and month-end controls
Bank Reconciliation: Step-by-Step Guide with Examples and Journal Entries
A bank reconciliation explains why cash in the general ledger differs from the bank statement at the same date. It separates legitimate timing differences from missing entries and errors, then documents a supported cash balance. This guide includes a complete numerical example, the required journal entries, and a practical review checklist.
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What is a bank reconciliation?
It is a dated comparison of an independent bank statement with the corresponding cash account in the books, supported by a listing of differences and their resolution. The bank’s balance and the ledger balance need not initially match because transactions can reach the two records at different times.
Bank-feed matching is useful, but it does not replace reconciling to the actual statement. A transaction can be matched to the wrong item, duplicated, dated incorrectly, or omitted from the feed. The close process should retain evidence of what was checked and who reviewed the conclusion.
Bank-side items versus book-side items
| Difference | Where it belongs | Another book entry? |
|---|---|---|
| Deposit in transit: recorded receipt not yet credited by the bank at cutoff. | Add to bank statement balance. | No, if the receipt is already correctly recorded. |
| Outstanding check: issued and recorded payment not yet cleared. | Subtract from bank statement balance. | No, if the payment is already correctly recorded. |
| Unrecorded bank service charge. | Subtract from book cash. | Yes: record the fee and cash reduction. |
| Unrecorded interest earned. | Add to book cash. | Yes: record cash and the appropriate income or receivable account. |
| Customer payment returned NSF. | Reduce book cash if the bank reversal is not yet recorded. | Usually reinstate the receivable; handle fees separately. |
| Company posting error. | Correct book records by the supported difference. | Yes, using the account affected by the original error. |
| Confirmed bank error. | Adjust the bank side in the direction needed to correct the statement error. | Normally no book entry solely to copy the bank’s error; document and follow up. |
“Bank side” describes the workpaper adjustment, not an instruction to change the bank statement. Verify suspected errors with supporting documents. Do not classify an unexplained difference as a bank error merely to make the totals agree.
How to reconcile a bank account
- Set the scope: identify the entity, bank account, currency, statement period, and ending date.
- Confirm the starting position: compare the prior approved reconciliation with the beginning balance and investigate later changes to previously reconciled transactions.
- Collect evidence: obtain the statement, cash ledger, prior outstanding-item listing, deposit detail, check images, and relevant bank notices.
- Match transactions: compare amounts, dates, references, and payees. Trace grouped deposits and net settlements to their components.
- Identify timing items: list outstanding payments and deposits in transit, including prior-period items still open.
- Investigate book differences: establish missing fees, interest, returned receipts, duplicate entries, or recording errors.
- Post supported corrections: use the proper transaction workflow and date, then rerun the cash ledger.
- Tie and review: confirm both adjusted balances agree, retain evidence, and assign unresolved items for follow-up.
Worked bank reconciliation example
Original hypothetical example, September 30: the bank statement ends at $12,500 and the unadjusted cash ledger at $14,010. A $2,400 deposit is recorded but not yet credited by the bank. Two recorded checks totaling $1,700 have not cleared. The statement also shows $40 interest, a $50 bank fee, and a $600 returned customer payment, none yet recorded in the ledger.
A separate payment settled a previously recorded vendor payable for $500, but the company entered only $300. The bank cleared the correct $500. The books therefore understated both the reduction in cash and the reduction in AP by $200.
| Bank-side reconciliation | Amount | Book-side reconciliation | Amount |
|---|---|---|---|
| Statement ending balance | $12,500 | Unadjusted cash ledger | $14,010 |
| Add deposit in transit | + $2,400 | Add interest earned | + $40 |
| Subtract outstanding checks | − $1,700 | Subtract bank fee | − $50 |
| Subtract returned payment | − $600 | ||
| Correct understated payment | − $200 | ||
| Adjusted bank balance | $13,200 | Adjusted book balance | $13,200 |
Check the arithmetic: $12,500 + $2,400 − $1,700 = $13,200. Separately, $14,010 + $40 − $50 − $600 − $200 = $13,200. The agreement supports the reconciliation only when the individual items are valid and documented.
Journal entries for the example
| Supported adjustment | Debit | Credit |
|---|---|---|
| Record interest not previously accrued. | Cash $40 | Interest income $40 |
| Record bank service charge. | Bank fee expense $50 | Cash $50 |
| Reverse a previously recorded customer receipt returned NSF. | Accounts receivable $600 | Cash $600 |
| Correct the $500 vendor payment recorded as $300. | Accounts payable $200 | Cash $200 |
Debits total $890 and credits total $890 across these entries. Cash increases $40 and decreases $850, a net reduction of $810 from $14,010 to $13,200. The deposit in transit and outstanding checks require no new entry in this example.
When a customer or vendor is involved, preserve the subledger detail and apply the correction to the appropriate open item through the accounting system’s supported workflow. A standalone journal entry can leave an invoice or bill open if it is not properly linked. If interest was already accrued, credit the receivable instead of recognizing the income twice.
How the reconciliation connects to receivables and payables
A returned customer payment restores an amount owed by the customer; follow it through the Accounts Receivable Aging report. A corrected vendor payment must also leave the Accounts Payable Aging detail consistent with the ledger. Check cash, the control account, and the individual customer or vendor record together.
Not every bank deposit is revenue and not every withdrawal is an expense. Loans, transfers, customer collections, vendor payments, and owner transactions affect different accounts. Use the underlying transaction, not the bank-feed description alone, to determine the entry.
What to do when the reconciliation does not balance
- Check the basics: correct account, statement date, beginning balance, ending balance, and currency.
- Look for one-sided omissions: fees, interest, ACH payments, returns, and transfers may be missing from one record.
- Check duplicates and amounts: a difference equal to one transaction may indicate an omission; twice an amount may indicate a sign error. These are search clues, not proof.
- Trace grouped items: deposits can combine receipts, while merchant settlements can deduct fees. Reconcile gross activity to net cash.
- Inspect old items: trace subsequent clearing and supporting records rather than rolling unexplained balances forward indefinitely.
- Review prior changes: an altered or deleted reconciled transaction can disturb the opening position. Preserve the audit trail and investigate before changing prior reconciliations.
Do not post an unexplained “plug” to income or expense to force a zero difference. Likewise, do not automatically undo every prior reconciliation. Establish which transaction changed, the affected period, and the approved correction process before disturbing completed work.
Review checklist and follow-up log
Review unusual, old, or large reconciling items and confirm the final ledger agrees with the approved workpaper. Where practical, someone other than the person entering transactions should review the reconciliation. A zero arithmetic difference is not evidence that every payment was authorized or every transaction classified correctly.
Frequently asked questions
Are outstanding checks subtracted from the books again?
No, when they were already recorded correctly. Subtract them from the bank statement balance in the reconciliation because the bank has not yet reflected the payment.
Does a bank reconciliation change the bank statement?
No. It explains differences and identifies book corrections or items to raise with the bank. The original statement remains independent evidence.
How often should the account be reconciled?
Use the organization’s close and control requirements. Monthly reconciliation is a common cycle; high-volume or higher-risk accounts may also need more frequent monitoring and exception review.
Is the reconciled balance the same as spendable cash?
Not necessarily. Restrictions, upcoming payments, borrowing arrangements, and unsettled transactions affect liquidity. Connect the reconciliation to Working Capital and cash planning.
Continue learning
Follow the Accounting Cycle, review Adjusting Entries, and use Debits, Credits & Journal Entries to understand the posting logic. Return to the Accounting hub for the wider learning path.
Sources and example notes
- OpenStax: Bank Reconciliation and Associated Journal Entries — reconciliation framework and adjustment categories.
- Intuit QuickBooks: Bank Reconciliation — comparing accounting records with bank statements.
The September example, entries, troubleshooting approach, and checklist are original educational material. Actual corrections depend on source evidence, system workflows, accounting policies, and the relevant reporting period.