Bank reconciliation step by step

What a bank reconciliation is

A bank reconciliation is the comparison of the cash book (the bank account in your general ledger) with the bank statement at the same date, explaining every difference and correcting the ledger for items it has missed. It matters because cash is the account most exposed to error and fraud, and a reconciled bank balance is the anchor that auditors and lenders test first.

The two balances rarely agree on the day, and that is normal. A difference is acceptable only when every item in it is identified, dated and expected to clear. This guide works through the method and a full example; our guide on balance sheet reconciliation covers the same discipline for every other account.

Why the cash book and the bank statement differ

Remember the mirror image first. Your bank account is an asset, so money in is a debit in your books. To the bank, your money is a liability it owes you, so the same deposit is a credit on its statement. A statement in credit means a positive balance in your favour; an overdraft shows as a debit on the statement and a credit in your ledger.

Differences fall into three families. Timing differences clear by themselves and need no journal. Items the bank knows about but you do not need a journal in the cash book. Errors need correcting on whichever side made them.

• Timing: deposits in transit (recorded by you, not yet credited by the bank)
• Timing: unpresented or outstanding cheques and payments (issued by you, not yet paid by the bank)
• Bank-only items: bank charges, interest, direct debits, standing orders, direct credits from customers
• Bank-only items: dishonoured (returned) customer cheques
• Errors in the books: transpositions, amounts posted twice or to the wrong bank account
• Errors by the bank: another customer's transaction put through your account

The two-part method

The most reliable method adjusts both sides to one true figure. Part one updates the cash book for everything the bank knows and the ledger does not, and for any errors in the ledger. Part two starts from the statement balance and adjusts for timing items and bank errors. The two adjusted figures must be identical; the adjusted cash book is the balance that belongs in the financial statements.

Doing it this way keeps a clean split between items that need journals (part one) and items that do not (part two). A reconciliation that starts from the ledger and throws every difference into one list tends to hide unposted charges as reconciling items month after month.

• 1. Agree the opening position: last month's reconciliation and its outstanding items
• 2. Tick every statement line to the cash book, and every cash book line to the statement
• 3. List cash book items not on the statement: these are deposits in transit and unpresented payments
• 4. List statement items not in the cash book: charges, interest, direct debits and credits, returned cheques
• 5. Investigate differences in amount between matched items: one side has made an error
• 6. Adjust the cash book and post the journals
• 7. Reconcile the statement balance to the adjusted cash book
• 8. Review, sign and date; follow up every item that has not cleared by the next statement

Worked example: the facts

A company in Ireland reconciles its main euro current account at 31 March 2026. The cash book shows a debit balance of EUR 18,460. The bank statement shows a credit balance of EUR 20,900. Ticking the two records against each other produces the items below. Note the cheque 1042 difference of 180: it is divisible by 9 (180 divided by 9 = 20), which points straight to a transposition of 6 and 8, as explained in our guide on finding and correcting accounting errors.

• Receipts of EUR 4,200 banked on 31 March appear on the April statement
• Cheques 1041 for 2,850, 1043 for 1,120 and 1044 for 3,475 have not been presented: EUR 7,445 in total
• Bank charges of EUR 65 and interest received of EUR 40 are on the statement only
• An insurance direct debit of EUR 410 is on the statement only
• A customer's cheque for EUR 1,300 was returned unpaid; the statement shows it, the cash book does not
• A customer paid EUR 1,000 by bank transfer; the statement shows it, the cash book does not
• Supplier cheque 1042 for EUR 680 was entered in the cash book as 860; the bank paid 680
• The bank charged a EUR 250 cheque belonging to another customer to this account

Part one: adjusting the cash book

Start from the cash book balance of EUR 18,460 and apply every item the ledger does not yet reflect. The bank charges, interest, direct debit, dishonoured cheque and bank transfer are all real transactions that the business had not recorded. The cheque 1042 error overstated payments by 180, so correcting it increases the balance.

The adjusted cash book balance is 18,460 minus 65, plus 40, minus 410, minus 1,300, plus 180, plus 1,000, which is EUR 17,905. The net effect of the journals is minus 555. The dishonoured cheque goes back to the customer's account, so trade receivables rise again and credit control should follow it up; the insurance may belong partly in prepayments if it covers future months.

• Dr Bank charges 65 / Cr Bank 65
• Dr Bank 40 / Cr Interest income 40
• Dr Insurance expense 410 / Cr Bank 410
• Dr Trade receivables 1,300 / Cr Bank 1,300 (dishonoured cheque reinstated)
• Dr Bank 180 / Cr Trade payables 180 (cheque 1042 corrected from 860 to 680)
• Dr Bank 1,000 / Cr Trade receivables 1,000 (customer transfer)

Part two: the bank reconciliation statement

Now start from the statement and adjust for timing items and the bank's own error. Deposits in transit are added because the bank will credit them shortly. Unpresented cheques are deducted because the bank will pay them shortly. The wrongly charged EUR 250 is added back because the bank will reverse it once notified.

The adjusted bank balance is 20,900 plus 4,200, minus 7,445, plus 250, which is EUR 17,905, the same as the adjusted cash book. The reconciliation is complete. The bank error needs a written request to the bank and a check on the April statement that it has been reversed; no journal is posted for it, because the ledger was right.

• Balance per bank statement at 31 March 2026: 20,900
• Add deposits in transit: 4,200
• Less unpresented cheques 1041, 1043 and 1044: (7,445)
• Add cheque wrongly charged by the bank: 250
• Adjusted bank balance: 17,905
• Adjusted cash book balance: 17,905; difference nil

Reviewing reconciling items like an auditor

A reconciliation that balances can still hide problems. Reviewers and auditors look at the reconciling items themselves. Deposits in transit should appear on the statement within one to three business days; an older one may be fictitious, or evidence of lapping, where one customer's receipt is used to cover another's stolen payment. Unpresented cheques should be aged: cheques older than the local validity period, often six months, are stale and are usually written back to payables or to a liability for unclaimed amounts rather than left in the reconciliation indefinitely.

At year end, auditors also look at cheques written just before the year end but not sent until after it, which understates both cash and payables at the reporting date and can flatter the current ratio, and at transfers between the company's own accounts that appear as receipts in one account before leaving the other. ISA 505 external confirmations from the bank cover balances, loans, guarantees and signatories, so a reconciliation that cannot be agreed to the confirmation will be questioned.

Harder cases: currency, overdrafts and clearing accounts

A foreign-currency bank account is reconciled in the account's own currency first, then the reconciled balance is retranslated at the closing rate under IAS 21, because cash is a monetary item; our guide on IAS 21 foreign currency accounting covers the retranslation. Mixing currencies inside the reconciliation creates differences that are nobody's error. A bank overdraft that is repayable on demand and forms an integral part of cash management may be included in cash and cash equivalents under IAS 7 para 8, but it is still presented as a liability on the balance sheet unless the offsetting criteria are met.

Card acquirers and payment gateways usually settle net of fees, several days late and in batches. Record gross sales in a clearing account, record the fee as an expense, and reconcile the clearing account to the settlement reports; otherwise every settlement becomes a reconciling item. Transfers between the company's own accounts should go through an in-transit account that is cleared when both legs appear. Cash floats follow the same discipline, as our guide on petty cash accounting explains.

Frequency and control

Reconcile at least monthly, and daily or weekly for high-volume accounts. The preparer should not be the person who can make payments, and a reviewer should sign and date each reconciliation, looking at the age of each item rather than just the final nil difference. Never force the reconciliation with an unexplained balancing figure; an unexplained difference is itself a finding. Our guide on financial controls a small business actually needs explains how to split these duties in a small team, and the month-end close checklist guide explains where the bank reconciliation sits in the close.

Where fraud risk is higher, auditors and controllers use a proof of cash, sometimes called a four-column reconciliation. It reconciles not only the closing balances but also the opening balance, total receipts and total payments for the month, bank against books. A balance-only reconciliation can agree even when an unrecorded receipt and an unrecorded payment of the same size cancel out within the month; a proof of cash exposes both, because the receipts and payments columns will not agree.

Bank reconciliation in Skyline Nexus ERP

Skyline Nexus ERP handles bank reconciliation in the Treasury module. Treasury > Bank Reconciliation > New Reconciliation asks for the account, From Date, To Date, Statement Date, Statement Reference and Statement Ending Balance, and the side panel shows the Book Balance and the Last Reconciliation. Statements are imported as CSV, TXT, XLSX or XLS files, and an Auto-match screen pairs statement lines with book entries, after which you match remaining items, mark items outstanding, add adjustment lines, detect duplicates and print the finished reconciliation for the audit file.

Adjustment lines on the reconciliation are reconciliation adjustments. Record bank charges, interest and direct debits in the ledger through the normal routes, such as an expense or a journal entry, so that part one of the method above is reflected in the cash book. Treasury bank accounts are synced into the chart of accounts, and the trial balance warns about any bank account that has not been synced, which keeps the reconciled balance and the ledger balance on the same account.