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Bank Reconciliation: Explained with Examples 

Bank Reconciliation
Read Time: 4 min

Bank reconciliation might sound intimidating, but it’s simply ensuring your company’s financial records match your bank’s records. Think of it like comparing your grocery list to your receipt – you want to ensure everything adds up! This blog is your detailed guide to bank reconciliation, from its importance and purpose to the step-by-step process with clear examples. Whether you’re a bookkeeping beginner or a seasoned accountant, this blog will provide valuable insights and refresh your knowledge.

Table of Contents

Key Takeaways

  • Bank reconciliation ensures your company’s financial records match your bank’s records, guaranteeing accuracy and preventing errors or fraud.
  • Reconciliation is crucial for accurate financial reporting, cash flow management, and strong financial controls.
  • Identify differences between book and bank balances caused by outstanding checks, deposits in transit, bank fees, or errors.
  • Adjust your book balance using a simple formula to match the bank statement balance.
  • Follow the step-by-step process: gather documents, compare transactions, investigate discrepancies, record adjustments, reconcile balances, document the process, and repeat regularly.
  • Utilize automation tools like bank reconciliation software for efficiency and reduced errors.

Bank Reconciliation: Definition

Bank reconciliation is the process of matching the difference between the book balance and the bank statement balance, ensuring both records reflect the proper cash position of the company.

In simple terms, bank reconciliation matches your company’s accounting records (book balance) with your bank’s records (bank statement balance) for a specific period. This ensures accuracy and helps identify any discrepancies or errors.

Bank Reconciliation: Importance

Maintain an accurate financial record to sustain a healthy business. Bank reconciliation offers several key benefits:

  • Enhanced Accuracy: Reconciling your bank statements regularly minimizes errors and ensures your financial reports are reliable.
  • Fraud Detection: Discrepancies during reconciliation can uncover fraudulent activities like unauthorized transactions or check forgery.
  • Improved Cash Flow Management: Making informed decisions about investments, expenses, and borrowing needs can be achieved by adequately understanding your cash flow.
  • Stronger Financial Controls: Regular reconciliation demonstrates responsible financial management and adherence to best practices.

Bank Reconciliation: Purpose

The ultimate objective of bank reconciliation is to identify and explain the differences between your book and bank statement balances. These differences can arise due to:

  • Outstanding checks: Checks you’ve issued but have yet to be cashed.
  • Deposits in transit: Deposits you’ve made but have yet to be reflected on the bank statement.
  • Bank fees: Charges levied by the bank for services like account maintenance or transactions.
  • Errors: Mistakes in either your records or the bank’s records.

By reconciling your accounts, you can:

  • Verify the accuracy of your financial records.
  • Investigate and correct any errors.
  • Adjust your books to reflect the actual cash position.

Also Read: Best Bookkeeping and Accounting Software 

Bank Reconciliation: Examples

Let’s deep dive into some practical examples to solidify your understanding:

Example 1: Simple Reconciliation

  • Book balance: $10,000
  • Bank statement balance: $9,500
  • Outstanding check: $500

Explanation: The $500 difference is due to an outstanding check. We must adjust our book balance by subtracting $500 to match the bank statement balance.

Example 2: Reconciliation with Deposits in Transit

  • Book balance: $5,000
  • Bank statement balance: $6,000
  • Deposit in transit: $1,000

Explanation: The $1,000 difference is due to a deposit you made but has yet to be reflected on the statement. We must adjust our book balance by adding $1,000 to match the bank statement balance.

Example 3: Reconciliation with Bank Fees

  • Book balance: $20,000
  • Bank statement balance: $19,800
  • Bank fee: $200

Explanation: The $200 difference is due to a bank fee for account maintenance. We must adjust our book balance by subtracting $200 to match the bank statement balance.

Bank Reconciliation: Formula

While the process might seem complex, the core formula for bank reconciliation is relatively straightforward:


Adjusted Book Balance = Book Balance + Deposits in Transit – Outstanding Checks ± Bank Errors

This formula helps you calculate the adjusted book balance, which should ultimately match the bank statement balance.

Bank Reconciliation

Bank Reconciliation: Process

Now, let’s walk through the practical steps involved in bank reconciliation:

Gather documents

Collect your bank statement and the company’s accounting records (cash receipts, cash disbursements, etc.) for the relevant period.

Compare transactions

Match each transaction on your bank statement with a corresponding entry in your records—Mark off matched transactions.

Identify discrepancies

Look for any unmatched transactions or differences in amounts.

Investigate discrepancies

Research the reason behind each discrepancy. This might involve contacting the bank, merchant, internal team, or your outsourced accountant.

Record adjustments:

Outstanding checks: Add the amount of outstanding checks to your book balance.

Deposits in transit: Subtract the amount of deposits in transit from your book balance.

Bank fees: Subtract the amount of bank fees from your book balance.

Errors: Make necessary adjustments to your records and the bank statement (if applicable) based on your investigation.

Reconcile the balances:

After adjusting, your adjusted book balance should match your bank statement balance. If not, double-check your calculations and investigate any remaining discrepancies.

Document the process:

Maintain a record of your reconciliation process, including the date, period covered, adjustments made, and explanations for discrepancies. This documentation is an audit trail and helps identify trends or recurring issues.

Repeat regularly:

Conduct bank reconciliation regularly, ideally monthly or quarterly. This ensures timely identification and correction of errors, maintaining accurate financial records.

Bonus Tip: Utilize bank reconciliation software or online banking features to automate the process and minimize manual errors.


Bank reconciliation is a crucial financial practice for businesses of all sizes. By understanding its importance, purpose, and process, you ensure the correctness of your financial records, identify potential fraud, and make informed financial decisions. Remember, consistency and attention to detail are critical to successful bank reconciliations.

Bank Reconciliation