Bank reconciliation, step by step (with a worked example)
How to reconcile a bank statement to the cash account: timing differences, bank-only items, errors, and the journal entries the books need.
Month end · Updated 21 October 2026
A bank reconciliation explains every difference between the bank statement and your cash account at a date, and finds the true cash balance to report.
Two kinds of difference
Timing differences are already in your books but not yet processed by the bank. They need no journal entry:
- Deposits in transit — money you've banked that the bank hasn't credited yet. Add them to the bank balance.
- Outstanding payments — cheques or transfers you've recorded that haven't cleared. Subtract them from the bank balance.
Book-side items are on the statement but not yet in your books. They do need journal entries:
- Bank charges and returned (NSF) customer cheques — subtract from the book balance.
- Interest received and direct customer transfers — add to the book balance.
- Errors in your books — correct them in whichever direction fixes them.
The method
- Tick off every item that appears in both the statement and the cash account.
- List unticked book items: these are deposits in transit or outstanding payments.
- List unticked statement items: these need entries in your books.
- Adjust each side separately and check that both reach the same figure.
A worked example
| Amount | |
|---|---|
| Balance per bank statement | 12,480.00 |
| Add: deposit in transit | 2,150.00 |
| Less: outstanding cheques | (2,890.00) |
| Adjusted bank balance | 11,740.00 |
| Balance per cash account | 11,885.00 |
| Add: interest earned | 20.00 |
| Less: bank charges | (45.00) |
| Less: customer cheque returned unpaid | (300.00) |
| Add: payment recorded as 860 instead of 680 | 180.00 |
| Adjusted book balance | 11,740.00 |
Both sides agree at 11,740.00 — the cash figure for the statement of financial position.
The entries
Only the book-side items are journalised: record the interest and the bank charges; reinstate the customer's receivable for the returned cheque (debit Accounts receivable, credit Cash); and correct the payment error (debit Cash 180, credit Accounts payable 180).
When it won't reconcile
Check for transpositions (a difference divisible by 9), items entered twice, and amounts entered on the wrong side (a difference of twice the amount). Never force a reconciliation with an unexplained plug.
The entries, laid out
For the worked example above, the book-side items give four entries, all dated at the statement date:
| Entry | Debit | Credit | Amount |
|---|---|---|---|
| Interest earned | Cash | Interest income | 20.00 |
| Bank charges | Bank charges expense | Cash | 45.00 |
| Returned customer cheque | Accounts receivable | Cash | 300.00 |
| Payment recorded as 860 instead of 680 | Cash | Accounts payable | 180.00 |
After posting, the cash account moves from 11,885.00 to 11,885.00 + 20.00 − 45.00 − 300.00 + 180.00 = 11,740.00, matching the adjusted bank balance. The deposit in transit and outstanding cheques need nothing: they will clear on next month's statement — and if they don't, you investigate.
Overdrafts and bank feeds
If the account is overdrawn, the same method applies with the signs flipped: an overdraft is a credit balance in your cash account and a debit (amount owed to the bank) on the statement. Deposits in transit still reduce what you owe, and outstanding payments still increase it. Work in signed figures and the arithmetic takes care of itself.
Bank feeds and matching rules in accounting software do steps 1 to 3 for you, but they don't remove the need to reconcile. Rules can match the wrong items, duplicate imports happen, and a feed only shows what the bank has processed. Reconcile the ledger balance to the statement balance at the period end, and review what the software matched automatically.
What to do with old reconciling items
A reconciling item that keeps rolling forward is a warning sign. A deposit in transit should clear within a few days; if it hasn't, the money may never have been banked. A cheque that has been outstanding for months may be lost, cancelled or never sent; it may need to be written back to the supplier's account, depending on local rules for unclaimed amounts. Reviewers look for the age of reconciling items as much as for the balance agreeing.
Controls that make the reconciliation useful
- Reconcile every account, every month, including dormant and savings accounts.
- Separate duties: the person who reconciles shouldn't be the only person who can make payments or record receipts.
- Review and sign off: a second person checks the reconciliation, the supporting statement and the age of reconciling items.
- Use the bank's statement, not the cash book's view of it — obtain the statement or bank feed directly.
- Investigate, don't plug. An unexplained difference is posted nowhere until it is understood.
Common mistakes
- Adding outstanding cheques to the bank balance instead of deducting them.
- Posting journal entries for timing differences, which double-counts them next month.
- Forgetting a returned customer cheque, which leaves receivables understated.
- Correcting an error in the wrong direction — check which figure was right before posting.
- Reconciling to a figure from the wrong date.
Frequently asked questions
How often should a bank reconciliation be done?
At least monthly, and more often for high-volume accounts. Many businesses reconcile daily using bank feeds and matching rules.
Do deposits in transit need a journal entry?
No. They're already in your books. They appear on the bank statement once the bank processes them.
Which balance goes on the statement of financial position?
The adjusted balance — the figure both sides agree to after the reconciliation, which is the cash account balance once the book-side entries are posted.
Practise it
The bank reconciliations lesson has graded reconciliations and entries. The bank reconciliation workstation lets you match a statement to a cash book yourself. The Missing Cash case is a reconciliation that won't agree — with a reason you'll need to find — and the account reconciliation test mirrors what employers set. The Month-end accountant pathway puts reconciliations into the full close.