Guides
Bank Reconciliation: How to Do It, Step by Step
Bank reconciliation is the process of matching your cash records to the bank statement so both agree for a period. You compare the ending bank balance to your book (general ledger) cash balance, then account for timing differences and unrecorded items until the two sides tie out. Most businesses reconcile monthly, right after the bank statement posts.
The reason the two balances rarely match on the first look is timing. You record a deposit or write a check on one date; the bank records it days later. Some items, like service fees and interest, appear on the bank statement before they ever hit your books. Reconciliation isolates each difference and resolves it.
Why bank reconciliation matters
Reconciliation catches errors, fraud, and unrecorded transactions before they compound. When your book cash and the bank’s records diverge, the gap often signals a missed entry, a duplicated payment, a bank error, or an unauthorized withdrawal. Reconciling monthly keeps the cash line on your balance sheet accurate and defensible.
Auditors treat the reconciliation as primary evidence that reported cash is real. It also supports the cash flow statement, because a wrong cash balance distorts operating cash flow. Undetected reconciling items can carry forward for months, so the discipline of a monthly close matters more than the size of any single difference.
Bank side vs book side: the two-column model
A bank reconciliation adjusts two balances toward a single correct number. The bank side starts with the statement’s ending balance and corrects for items the bank has not yet processed. The book side starts with your general ledger cash balance and corrects for items you have not yet recorded. When both adjusted balances equal the same figure, the account is reconciled.
The split matters because it tells you where each item belongs. If the bank does not know about a transaction yet, it adjusts the bank side. If your books do not know about it yet, it adjusts the book side. Only book-side items require a journal entry, because you cannot post entries to the bank’s records.
| Reconciling item | Which side | Effect | Example |
|---|---|---|---|
| Deposits in transit | Bank side | Add | Receipts recorded in books, not yet posted by bank |
| Outstanding checks | Bank side | Subtract | Checks written and recorded, not yet cleared |
| Bank errors | Bank side | Add or subtract | Bank posts wrong amount |
| Interest earned | Book side | Add | Interest credited by bank, not yet in books |
| Bank service charges | Book side | Subtract | Monthly fees, wire fees, overdraft fees |
| NSF (bounced) checks | Book side | Subtract | Customer check that failed to clear |
| Book errors | Book side | Add or subtract | You recorded a check for the wrong amount |
What deposits in transit are
A deposit in transit is cash you have recorded in your books but the bank has not yet posted to your account. It typically happens near period-end: you record a day’s receipts on the 30th, but the bank processes them on the 1st or 2nd of the next month. Because the bank statement omits the amount, you add it to the bank side.
Deposits in transit are self-correcting. The deposit that is “in transit” on this month’s reconciliation should appear on next month’s bank statement. If a prior deposit in transit never posts, that is a red flag worth investigating, because it may indicate a lost deposit or a recording error.
What outstanding checks are
An outstanding check is a check you have written and recorded as a payment but the payee has not yet cashed, so the bank has not deducted it. Because your books already reflect the reduction and the bank does not, you subtract outstanding checks from the bank side.
Checks can stay outstanding for weeks. Under U.S. banking practice, a check is often considered stale after six months, and banks may decline to honor it, though rules vary by state and bank policy. Track outstanding checks by number and date; a check that stays outstanding for many months may need to be voided and reissued, and unclaimed amounts can eventually fall under state unclaimed-property (escheatment) rules.
How to do a bank reconciliation, step by step
Follow these numbered steps for a standard monthly reconciliation. The goal is to make the adjusted bank balance equal the adjusted book balance, then post journal entries for every book-side change.
- Gather your records. Pull the bank statement for the period, your general ledger cash account, the prior month’s completed reconciliation, and any deposit slips or check registers.
- Confirm the starting point. Note the bank statement’s ending balance and your book cash balance. Verify last month’s reconciling items cleared this month.
- Match deposits and credits. Tick off every deposit that appears in both records. Deposits recorded in your books but missing from the statement are deposits in transit (bank side, add).
- Match checks and debits. Tick off every cleared check and withdrawal. Checks recorded in your books but not on the statement are outstanding checks (bank side, subtract).
- List bank-only items. Find charges and credits the bank posted that you have not recorded: service fees, interest earned, NSF checks, and automatic payments. These are book-side items.
- Adjust the bank side. Start with the statement balance, add deposits in transit, subtract outstanding checks, and correct any bank errors. This yields the adjusted bank balance.
- Adjust the book side. Start with your book balance, add interest earned, subtract service charges and NSF checks, and correct any book errors. This yields the adjusted book balance.
- Confirm the two balances agree. The adjusted bank balance must equal the adjusted book balance. If they do not, recheck for a missed item, a transposition, or a duplicated entry.
- Record journal entries. Post an entry for every book-side item, then file the reconciliation as support for the period.
A worked reconciliation example
Assume Delta Supply Co. has a March 31 bank statement ending balance of $18,450 and a book cash balance of $16,900. During the month, a $2,200 deposit recorded March 31 has not yet posted, two checks totaling $3,150 are outstanding, the bank charged a $40 service fee, credited $60 in interest, and returned a $500 customer NSF check.
| Bank side | Amount | Book side | Amount | |
|---|---|---|---|---|
| Statement ending balance | $18,450 | Book cash balance | $16,900 | |
| Add: deposit in transit | +$2,200 | Add: interest earned | +$60 | |
| Less: outstanding checks | -$3,150 | Less: service charge | -$40 | |
| Less: NSF check | -$500 | |||
| Adjusted bank balance | $17,500 | Adjusted book balance | $17,420 |
The two adjusted balances do not match, so an item is missing or miscoded. On review, Delta finds a $80 check it recorded as $0 (a book error). Subtracting the additional $80 from the book side brings the adjusted book balance to $17,420 minus $80, which equals $17,340. That still does not tie, so the error was actually a $160 recording mistake: the check was written for $240 but booked at $80. Correcting the full $160 book-side understatement makes the adjusted book balance $17,500, matching the bank side.
The journal entries you must post
Only book-side items require journal entries, because the bank corrects its own records automatically over time. Each book-side adjustment either debits or credits Cash. If the item was added to the book side, debit Cash. If it was subtracted, credit Cash. For Delta Supply Co., the entries are:
| Account | Debit | Credit |
|---|---|---|
| Cash (interest earned) | $60 | |
| Interest Income | $60 | |
| Bank Service Charge Expense | $40 | |
| Cash (service fee) | $40 | |
| Accounts Receivable (NSF customer) | $500 | |
| Cash (NSF check) | $500 |
The NSF entry restores the customer’s balance in accounts receivable because the customer still owes the money. If your accounting software auto-imports the bank feed, some of these may post automatically, but you should still confirm each one lands in the right account. These postings follow standard journal entry rules: every entry has an equal debit and credit.
Common reconciling items and where they go
Reconciling items fall into predictable categories. Knowing the category tells you the side and the direction without re-deriving it each month.
- Timing differences (bank side): deposits in transit and outstanding checks. No journal entry; they clear on their own.
- Bank-initiated items (book side): service charges, wire fees, interest earned, and loan payments the bank drafts automatically.
- Returned items (book side): NSF checks, which reverse a receipt you already recorded and move the amount back to receivables.
- Errors (either side): a transposed figure or a check booked at the wrong amount. Correct the side where the mistake was made.
Recording these correctly keeps the general ledger clean, which feeds the trial balance at the close.
Frequently asked questions
How often should I do a bank reconciliation?
Most businesses reconcile monthly, right after the bank statement posts, so errors and fraud surface within 30 days. High-volume businesses often reconcile weekly or daily using bank feeds. The right frequency depends on transaction volume and cash risk; the more accounts and transactions you run, the more often reconciling pays off.
Which items on a bank reconciliation require a journal entry?
Only book-side items require a journal entry, because you cannot post entries to the bank’s records. These include interest earned, bank service charges, NSF checks, automatic drafts, and any book errors. Bank-side items, such as deposits in transit and outstanding checks, need no entry; the bank posts them itself in a later period.
What is the difference between a deposit in transit and an outstanding check?
A deposit in transit is money you recorded as received but the bank has not yet posted, so you add it to the bank side. An outstanding check is a payment you recorded and issued but the payee has not cashed, so you subtract it from the bank side. Both are timing differences that clear in a later period without a journal entry.
Why doesn’t my bank balance match my book balance?
The two rarely match because of timing and unrecorded items. Deposits in transit and outstanding checks have not cleared the bank yet, while service charges, interest, and NSF checks appear on the statement before you record them. Reconciliation identifies each difference and adjusts both sides to a single correct figure.
What happens to an NSF check on a reconciliation?
An NSF (nonsufficient funds) check is a customer payment that failed to clear. Because you already recorded it as cash received, you reverse it: subtract the amount from the book side, then debit Accounts Receivable and credit Cash. The customer still owes the money, so the balance moves back to receivables until they pay by another method.
Can software do bank reconciliation automatically?
Bank feeds in accounting software can match most transactions automatically and flag exceptions, which speeds up the process. It still requires human review: you confirm the matches, categorize new items, and post journal entries for fees, interest, and returned checks. Automation reduces manual matching but does not replace the judgment of a proper monthly close.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.