In plain English
Each month, compare the statement ending balance to your books. Differences are normally outstanding checks, deposits in transit or items not yet recorded.
A completed reconciliation should show a zero difference.
Why it matters
A reconciliation proves that your books include every transaction that went through the bank and nothing that did not. It catches duplicated entries, missing deposits, bank fees, fraud and payments recorded in the wrong month. Every report you produce is only as reliable as the reconciled cash beneath it.
When your accountant prepares a tax return or a lender reviews your statements, one of the first questions is whether the accounts are reconciled. Unreconciled books often mean extra time and fees at year end while someone untangles months of activity.
Worked example
Statement $9,640 - outstanding checks $620 + deposit in transit $185 = $9,205, which matches the books.
How to handle it
- Download the bank statement for the month and note its ending balance and date.
- In your software or spreadsheet, check off each transaction that appears on both the statement and your books.
- Investigate anything on the statement that is missing from your books, and anything in your books that never cleared.
- Finish only when the difference is zero, then save the reconciliation report.
- Review the list of uncleared items each month and follow up on any that are more than a couple of months old.
Common mistakes
- Forcing the difference to zero with an adjustment entry, which hides the real error and lets it grow.
- Reconciling against the online bank balance instead of the statement, which makes results shift each time you look.
- Editing or deleting transactions in a month that is already reconciled, which breaks the prior reconciliation without warning.
- Ignoring old outstanding checks, which may never be cashed and leave cash overstated.
Not the same as: Trial balance
A bank reconciliation checks one account against an outside record. A trial balance checks that all accounts in the ledger have equal debits and credits. See Trial balance.
Go deeper
- How to reconcile a bank account (and why it matters): A plain-language walkthrough of bank reconciliation in QuickBooks, Xero and other software: what it is, how to do it, and what to do when it will not balance.
- How Bank Reconciliation Works in Xero: Match bank statement lines in Xero using find and match, create new transactions, use bank rules and finish a clean reconciliation.
Related terms
- Bookkeeping: The ongoing recording and organizing of a business's financial transactions.
- Capital contribution: Money or property an owner puts into a business in exchange for an ownership stake, not as a loan.
- Balance sheet: A report showing what a business owns, owes and the owner's stake on a specific date.
Common questions
What is a bank reconciliation?
Comparing your books to the bank statement so both agree after accounting for timing differences.
Can you give an example of bank reconciliation?
Statement $9,640 - outstanding checks $620 + deposit in transit $185 = $9,205, which matches the books.
Do I need to reconcile if my software imports bank transactions automatically?
Yes. Imports can duplicate, skip or misdate items, and you may also enter transactions manually. Reconciling confirms that everything recorded agrees with the bank.
Should I reconcile credit cards too?
Yes. Card statements should be reconciled the same way, along with loan, payment processor and any other accounts that have statements.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.