Bank reconciliation is simply the process of comparing your company’s internal cash records (often called the cash book) with your actual bank statement to make sure everything lines up. Think of it this way: anytime you’re performing a bank reconciliation, you’re double-checking that what your books say you have truly matches what’s in your bank account.
If you run a business, you’re likely using a bank account for all your payments and receipts. Simultaneously, you’re tracking these transactions in your own accounting system—usually in what we call the cash book.
Now, in a perfect world, the balance in your cash book and the balance on your bank statement would always match. But let’s be real—that rarely happens. You’ll find payments that haven’t cleared yet, bank charges you forgot to record, or even human error. It’s completely normal for these balances not to match. And that’s precisely why bank reconciliation is so important. This isn’t about finding fault; it’s just part of keeping your books clean and accurate.
Common Causes of Discrepancies in Bank Reconciliation
From my own experience, a major issue often arises when businesses skip regular reconciliations. I recall one clear instance: a company had written several cheques to suppliers, but those suppliers never cashed them. The cheques sat unpresented for over nine months and eventually went stale. However, the company’s books had already marked these as paid, leading to understated payables and a cash balance that looked much lower than it actually was.
Unpresented cheques are just one common reason your cash book balance might not match your bank statement. Other typical causes include:
- Deposits in transit – payments you’ve received and recorded, but the bank hasn’t processed them yet
- Bank charges and fees – service charges, overdraft fees, or other deductions you might’ve missed recording
- Timing differences – when a transaction shows up in your books on one date but hits the bank at a different time
- Human errors – things like data entry mistakes, duplicated entries, or forgetting to record a transaction altogether
What is the Importance of a Bank Reconciliation
Let me put it simply—bank reconciliation is one of those things that seems small, but makes a big difference. When you’re running a business, you’re juggling a lot. Money’s moving in and out constantly. You’ve got sales coming in, suppliers to pay, items to buy, bank fees, etc., and it doesn’t stop. And somewhere in between all that, you’re also trying to keep track of your cash.
Now here’s the thing: just because a transaction shows up in your accounting system doesn’t mean the money’s actually moved. And just because it’s hit the bank doesn’t mean you’ve recorded it correctly. Bank reconciliation is what connects the dots. It’s how you make sure your books match the real-world movement of money.
I’ve seen so many cases, especially with small businesses, where people assume their accounting software is giving them the full picture. But if you’re not reconciling with the bank regularly, there could be errors, missing transactions, or even duplicated entries that throw everything off. You might end up thinking you’ve got more cash than you actually do (which is dangerous), or less than you have (which can lead to missed opportunities or unnecessary panic).
I’ve personally worked with businesses where unreconciled cheques sat in the books for months—cheques that were never even cashed. This meant cash was showing as gone when it was still sitting in the bank, and worse, accounts payable looked lower than it actually was.
Here’s why bank reconciliation is important for any business, big or small:
- It helps you catch mistakes early. We all make errors sometimes—maybe you typed a number wrong or missed a transaction. Doing a reconciliation helps you spot those errors before they become big problems.
- It keeps you safe from fraud. If a fraudulent person makes a payment from your account without you knowing, checking your bank statement against your books is the best way to catch it quickly.
- It gives you the real picture of your cash. You want to know exactly how much money you actually have. If your records don’t match the bank, you could think you’ve got more (or less) than you really do.
- It helps you avoid paying bills twice—or missing them altogether. Nobody wants to accidentally double-pay a supplier or forget a payment. Reconciliation keeps that in check.
In the next section, I’ll walk you through a simple example of how bank reconciliation actually works, so you can see exactly what to look for and how to stay on top of it.
So How Do You Actually Do a Bank Reconciliation?
Here’s how I like to explain it, step-by-step, in plain terms:
- Grab Your Tools
You’ll need two things:
Your most recent bank statement (for a specific period—monthly is usually best).
Your cash book or accounting records for that same period.
If you’re using software like QuickBooks, Xero, or Wave, your cash book is probably already in there. If not, maybe you’re keeping track in Excel or even manually. Whatever the case, make sure you’re working with the same date range for both.
- Start with the Ending Balances
Look at the ending balance on your bank statement. Then look at the ending balance in your cash book for the same period. If they match—great! But they probably won’t. And that’s okay. That’s exactly what we’re here to figure out.
- Tick Off Matching Transactions
Go line by line through your bank statement and match each transaction to one in your cash book.
A customer deposit? Find it in both places and tick it off.
A supplier payment? Same thing—tick it off when you see it recorded in both.
Any withdrawals, transfers, fees, or charges? Match and tick.
Some accounting software does this automatically with bank feeds, but I always recommend giving it a proper look—because automation doesn’t always catch everything.
- Identify What’s Missing or Outstanding
Now, what’s left over? What’s in your books but not on the bank statement? And what’s in the bank statement but missing from your books?
You might find things like:
- Uncleared cheques – payments you made that haven’t been cashed yet.
- Deposits in transit – customer payments you recorded but haven’t cleared the bank.
- Bank charges – fees or interest the bank took out that you didn’t record.
- Errors – double entries, typos, or even forgetting to record something altogether.
- Adjust Your Records
Once you’ve figured out what’s causing the difference, you’ll need to make adjustments in your books so your cash balance reflects reality.
You don’t change the bank statement—it is what it is. But you can update your cash book to:
Add missing bank charges or interest.
Correct any errors.
Note any uncleared items that are still in process.
A Simple, Real-World Bank Reconciliation Example
Imagine you’ve just wrapped up your bookkeeping for the month, and your cash book shows a balance of $6,750. But when you check your bank statement, the balance is sitting at $8,800.
So now you’re thinking,
“Wait… where’s that $2,050 difference coming from?” Don’t stress—this happens all the time. Let’s walk through it together and get everything lined up.
- Step 1: Compare the Two Records
After comparing the details on your cash book with the bank statement, here’s what you notice:
What’s in the cash book but Not on the bank statement:
You issued Cheque #501 for $600, but the supplier hasn’t cashed it yet (unpresented cheque).
You also issued Cheque #502 for $250, and that one’s still unpresented, too.
These are called outstanding cheques or unpresented cheques.
What’s on the bank statement but not in your cash book:
A customer deposited $1,550 directly into your bank account.
The bank charged a $50 monthly fee.
There was a direct debit of $300 for your business’s annual internet renewal fee.
These are transactions you hadn’t recorded yet in your cash book.
- Step 2: Look at Your Cash Book
Let’s take a quick peek at what your cash book looks like before reconciliation
So at the end of the month, your books (cash book) say you’ve got $6,750 in the bank; however, in reality, your bank statement is showing a different balance.
But now let’s adjust this balance to include what the bank knows (that you didn’t).
- Step 3: Starting from the Cash Book Balance
Start with your current cash book balance: $6,750
Add:
Customer deposit not yet recorded: +$1,550
Subtract:
Bank fee: –$50
Internet renewal direct debit: –$300
Adjusted cash book balance: $7,950
- Step 4: Starting from the Bank Statement Balance
To arrive at the adjusted cash book balance of $7,950, let’s start with the bank statement balance: $8,800.
Subtract the two outstanding cheques (as they reduce your actual cash, but the bank hasn’t processed them yet, making the bank balance seem higher than it is):
Outstanding Cheque #501: –$600
Outstanding Cheque #502: –$250
Adjusted Bank Statement Balance: $8,800 – $600 – $250 = $7,950
Great! Your adjusted cash book balance now agrees with your adjusted bank balance.
If you adjust the cash book, you’ll catch up to the bank. If you adjust the bank, you reflect what’s already in your books.
How Often Should You Do Bank Reconciliation?
You might be wondering, “How often do I actually need to sit down and do this bank reconciliation thing?’ Well, the answer depends a lot on your business size, how many transactions you have, and how important cash flow is to you.
For small businesses or startups with just a handful of transactions each week, doing a bank reconciliation once a month—right after you get your bank statement—is usually enough. It keeps things tidy without taking up too much of your time.
If you’re dealing with more transactions, or if cash flow is tight, it’s smart to do bank reconciliation more frequently—maybe every week or even every few days. The more often you check, the faster you can spot mistakes or missing payments, which helps you stay on top of your money.
For larger businesses or those with numerous daily transactions, some even reconcile their accounts daily. That might sound intense, but it helps keep everything super accurate and up to date, which is critical when the numbers are moving fast.
Bottom line? Find a rhythm that fits your business and your peace of mind. The goal is to make reconciliation a regular habit, not a stressful scramble at the end of the month.
Manual Reconciliation vs. Software Reconciliation: What’s the Difference?
When it comes to bank reconciliation, you’ve got two main options: do it yourself by going through your bank statement and cash book line by line, checking off transactions that match and digging into any differences, or use accounting software like QuickBooks or Xero that connects directly to your bank and does most of the matching for you. Doing it by hand helps you really get to know your numbers and catch mistakes up close, but it can be time-consuming and easy to miss things. On the other hand, software saves you a lot of time, cuts down errors, and keeps your books up to date, though you still need to review what it matches and understand the process—and there’s usually a bit of a learning curve if you’re new to it.
Bank reconciliation is all about staying on top of your cash. When you do it regularly, you catch issues early, keep your books accurate, and avoid surprises. It doesn’t have to be complicated—just make it a habit, and your numbers will always tell the real story.
If you want to understand how bank reconciliation connects to the bigger picture of your finances, it helps to look at your cash flow statement. Since both deal with the actual movement of money in and out of your business, doing regular bank reconciliations ensures that your cash flow report reflects what’s really happening in your bank account. If you’re not familiar with what a cash flow statement is, check out this post that breaks it down step by step.