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Bank Reconciliation - Explained

What is a Bank Reconciliation?

Written by Jason Gordon

Updated at November 30th, 2021

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Table of Contents

What is a Reconciliation? What is a Bank Reconciliation?How to Complete a Bank ReconciliationHow is an Accounting Reconciliation Used?How is a Bank Reconciliation Used?What is the Bank Reconciliation Process:Example of a Bank ReconciliationAnother Example of Bank Reconciliation

What is a Reconciliation? 

Reconciliation is an accounting process that ensures two related sets of records are in agreement. This method is used for confirming that the total money leaving the account matches the money actually spent. It makes sure these two records are balanced at the end of the recording period. A slight discrepancy may arise due to the time difference of deposits and payments, but any unexplained difference indicates a theft or a manipulation in the books.

What is a Bank Reconciliation?

Bank reconciliation is a statement document that matches a company's balance sheet cash balance with the actual balance in the bank. Reconciling the two helps a company manage accurate account records and detect embezzlement of funds and account manipulations.

Back to: ACCOUNTING, TAX, & REPORTING

How to Complete a Bank Reconciliation



There are  two sides to a bank reconciliation - the bank side and the book side. With both sides, we start with the unadjusted balances. The above video takes you through these steps. 

How is an Accounting Reconciliation Used?

Reconciliation is important for maintaining a correct record of accounts. It provides accuracy and consistency and helps in avoiding balance sheet errors and maintaining financial integrity. It eliminates the scopes of errors and mitigates mistakes. It also identifies any fraudulent withdrawals from the account. Both businesses and individuals should follow this method for managing their accounts to avoid discrepancies. It may be done daily, monthly or annually depending on the size of the account. 

Double entry accounting is one of the main elements of Generally Accepted Accounting Principles (GAAP). In double entry accounting practice, every transaction is recorded twice in a balance sheet, once as the debit and again as credit. The debit column records the change in the asset side and the credit reflects the change in the equity side. For example, a company owes $200 to its vendor, this amount is to be recorded as the credit under the accounts payable columns and the same amount is to be recorded as debit under the column devoted for expenses. When the amount is paid to the vendor, accounts payable is debited and the cash column is credited. These two should balance at zero. 

Reconciliation is used by companies to ensure that the income statement and cash flow statement matches with one another. It is also effective for maintaining an error-free personal bank account. Individuals may reconcile their checkbooks and credit card accounts with their bank statements. In this way, they can keep a check on any fraudulent transaction or error made by the financial institutions. They can get an overall picture of their expenses by using this method.

How is a Bank Reconciliation Used?

A bank statement shows a company's starting balance, transactions and ending balance in a given period. The ending balance on a bank statement normally differs with the company's ending balance due to checks not received by the bank (deposits in transit), checks that have not been processes, bank service fees, interest paid by banks and not-sufficient fund checks. Today, most companies are using specialized software to get frequent updates and do the adjustments required on the accounts.

What is the Bank Reconciliation Process:

Start by comparing the checks that have been processed as seen on the bank statement with those that the company has received. On the bank statement balance, add deposits in transit and deduct all outstanding checks to get the adjusted bank statement balance. From the balance sheet balance, calculate and add interests earned and any other receivable amount. Deduct bank service fees, NSF checks, and penalties from the balance sheet balance to get the adjusted balance sheet balance. After this reconciliation, the bank statement and balance sheet balances should match.

Example of a Bank Reconciliation

The below video takes you through a Bank Reconciliation

Another Example of Bank Reconciliation

XYZ company is preparing a bank reconciliation for the items:

  • Bank statement with a $300,000 ending balance on February 20, 2018, whereas the balance sheet shows a $260,900 ending balance.
  • Bank statement shows a $100 service fee
  • Bank statement shows interest income of $20
  • The company issued checks worth $50,000 that are yet to clear
  • The company deposited $20,000 that has not been shown on the bank statement
  • A check of $470 paid to the office supplier was misreported as $370.
  • A note receivable totaling $9,800 was taken by the bank.
  • A check worth $520 deposited has been charged back as NSF.

Amount Adjustments to books Ending Bank Balance $300,000 None 

Uncleared cheques deducted $50,000 None

 Deposit in transit added + $20,000 None 

New Bank Balance $270,000 None 

Ending Book Balance $260,900 None 

Service charge deducted $100 Debit expense, credit cash 

Interest income added + $20 Debit cash, credit interest income 

Error on check deducted $100 Debit expense, credit cash 

Note receivable added +$9,800 Debit cash, credit notes receivable 

NSF check deducted $520 Debts accounts receivable, credit cash 

New Book Balance $270,000 

Related Topics

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  • Internal Controls when Accounting for Inventory – Financial Accounting
  • Internal Controls when Accounting for Cash – Financial Accounting
  • What is Liquidity, Cash, and Cash Equivalents? – Financial Accounting
  • What is Cash Management? – Financial Accounting
  • Internal Controls for Cash Receipts? – Financial Accounting
  • Internal Controls for Cash Disbursements – Financial Accounting
  • Internal Controls for Bank Activities – Financial Accounting
  • Bank Reconciliation - Explained?
bank reconciliation reconciliation

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