How do I do a bank reconciliation, step by step?

01Why book and bank disagree#

Your books and your bank record the same money from two sides, at two different times. You record a check when you write it; the bank records it when the payee deposits it. You record a Stripe payout when it is initiated; the bank records it when it lands. The bank records a wire fee or interest the day it happens; you learn about it from the statement.

So on any given day the two balances differ, and that is normal. What a reconciliation does is name every difference. Timing differences, items the bank has not processed yet, are left to clear on their own. Items the books have not recorded yet are booked. Anything else is an error, and it is found and fixed.

02The four kinds of difference#

Every reconciling item falls into one of four groups, and each is handled differently:

The first two adjust the bank side and need no entry; they will clear next month. The third adjusts the book side and needs an entry. Errors need a correcting entry in the open month.

• Deposit in transit: recorded in the books, not yet on the bank statement. A payout initiated on the 30th that arrives on the 1st.
• Outstanding check or payment: recorded in the books, not yet cleared the bank. A check mailed to the landlord that has not been deposited.
• Bank-only items: on the statement, not yet in the books. Bank fees, interest earned, a returned payment, an automatic debit nobody recorded.
• Errors: a transaction recorded at the wrong amount, twice, or not at all, on either side.

03A worked reconciliation#

An illustrative operating account at September 30, in round numbers, negatives in parentheses:

Two journal entries bring the books up to date: debit Bank fees $25; credit Cash $25. Debit Cash $125; credit Interest income $125. The deposit in transit and the outstanding check need nothing; they should appear on October’s statement, and October’s reconciliation confirms that they did.

• Bank balance per statement, September 30: $142,300.
• Add deposit in transit: $4,000. Less outstanding check: ($7,000). Adjusted bank balance: $139,300.
• Book balance before adjustments: $139,200.
• Less bank fee not yet booked: ($25). Add interest not yet booked: $125. Adjusted book balance: $139,300.
• Difference: $0.00.

04Step by step#

QuickBooks Online and Xero both have a reconcile screen that walks through this. The steps underneath are the same in any system:

• Get the bank statement for the full month, not a balance from the app on a different day.
• Confirm the opening balance matches last month’s reconciled closing balance. If it does not, something in a closed month changed, and that comes first.
• Match every statement line to a transaction in the books: amount, date and payee.
• List what is in the books but not the bank: deposits in transit and outstanding payments.
• List what is in the bank but not the books: fees, interest, returned items, unrecorded debits. Book each one.
• Investigate anything that matches on payee but not amount, or appears twice.
• Confirm the difference is $0.00, save the reconciliation report, and lock the month.

05What “reconciled to $0.00” means#

It means the difference between the book balance and the bank balance on the statement date is fully explained, every dollar of it, by items you can name. It does not mean the two balances are equal: in the example they differ by $3,100 at the start, and the reconciliation still ends at $0.00 because $3,000 of that is a deposit in transit and an outstanding check, and the last $100 is a fee and interest the books had not yet recorded.

It also does not mean every transaction is categorized correctly. A $1,200 software payment booked as rent reconciles perfectly; the cash is right and the expense line is wrong. Reconciliation proves the cash. Review of the categories is a separate step in the close.

06How often, and what to watch for#

Reconcile every bank and card account monthly, for every month, before the month’s statements go to anyone. Match the bank feed more often if volume is high; a daily or weekly match makes month end a check rather than a search. Reconcile the Stripe or PayPal balance too, because payouts are batched and a missing payout is invisible in the bank alone.

Watch reconciling items that do not clear. A deposit in transit should arrive in a day or two; one that is still open next month may never have been sent. An outstanding check older than a few months should be followed up. A list of old reconciling items that grows each month is a sign the reconciliation is being forced to zero rather than explained.

07What never to do#

The shortcuts that make a reconciliation finish faster are the ones that make it worthless:

• Never plug an unexplained difference to a suspense or miscellaneous account.
• Never edit or delete a transaction in a reconciled, closed month to make this month work.
• Never reconcile to an online balance on a different date from the statement.
• Never mark a transaction cleared that is not on the statement.