How to Do a Bank Reconciliation Step by Step: Find Every Discrepancy and Balance to the Penny

A bank reconciliation compares your company's cash balance (from the general ledger) to the bank's cash balance (from the bank statement) and explains every difference between them. The two balances almost never match because of timing differences: you wrote a check that the recipient has not cashed yet, or you deposited cash that the bank has not processed yet, or the bank charged fees that you have not recorded. The reconciliation starts with both balances and adjusts each one until they agree. Items that the bank knows about but you do not (bank fees, interest earned, NSF checks, automatic payments) require adjusting journal entries in your books. Items that you know about but the bank does not (outstanding checks, deposits in transit) require no journal entry — they will clear when the bank processes them. Here is the format: Bank side: Bank statement balance + deposits in transit − outstanding checks ± bank errors = Adjusted bank balance. Book side: Book (ledger) balance + interest earned − bank fees − NSF checks ± book errors = Adjusted book balance. When both adjusted balances are equal, the reconciliation is complete. If they do not match, there is an error somewhere — and finding it is the whole point of the exercise. Snap a photo of any bank reconciliation problem and AccountingIQ walks through each adjustment, identifies which side it belongs to, records the journal entries, and confirms the balances match.

Bank-side additions — Deposits in transit: you deposited cash or checks that have not yet appeared on the bank statement. This happens when you make a deposit on the last day of the month and the bank processes it the next business day. Add these to the bank balance because the bank will see them soon. Bank-side subtractions — Outstanding checks: checks you wrote that the payee has not yet cashed or deposited. You already recorded the check (credited Cash, debited the appropriate expense), but the bank has not reduced your balance yet. Subtract these from the bank balance. Bank errors: the bank debited your account for someone else's check, or credited you for a deposit that was not yours. These are rare but do happen. Add or subtract as needed to correct the bank balance, and notify the bank. Book-side additions — Interest earned: the bank paid interest on your account balance. You did not record it because you did not know the exact amount until the statement arrived. Add to the book balance. Journal entry: debit Cash, credit Interest Revenue. Book-side additions — Direct deposits / electronic collections: a customer paid you electronically (ACH, wire) and the bank received it, but you did not record the receipt. Add to book balance. Journal entry: debit Cash, credit Accounts Receivable. Book-side subtractions — Bank service charges: monthly fees, per-check fees, wire fees. Subtract from book balance. Journal entry: debit Bank Fees Expense (or Miscellaneous Expense), credit Cash. Book-side subtractions — NSF (non-sufficient funds) checks: a customer's check that you deposited bounced. The bank removed it from your account, but your books still show the deposit. Subtract from book balance. Journal entry: debit Accounts Receivable (the customer still owes you), credit Cash. Book errors: you recorded a check for $450 as $540 (transposition error). The bank cleared the correct amount ($450). You need to add the $90 difference back to your book balance. Journal entry: debit Cash $90, credit the expense account that was overstated $90. AccountingIQ identifies each reconciling item by type and generates the correct journal entry automatically — it is especially useful for complex reconciliations with multiple adjustments.

Company XYZ's records on June 30: Cash balance per books = $8,450. Bank statement balance = $9,210. Reconciling items discovered: 1. Deposit in transit: $1,200 (deposited June 30, not on bank statement) 2. Outstanding checks: #1501 for $380, #1504 for $650, #1507 for $125 (total: $1,155) 3. Bank service charge: $35 4. Interest earned: $18 5. Customer Jones's check returned NSF: $400 6. Company recorded check #1499 as $270; correct amount was $720 (error of $450 — book balance is overstated by $450) 7. Bank collected a note receivable on Company's behalf: $1,500 (company did not know) Bank side reconciliation: Bank statement balance: $9,210 + Deposits in transit: +$1,200 − Outstanding checks: −$1,155 = Adjusted bank balance: $9,255 Book side reconciliation: Book balance: $8,450 + Interest earned: +$18 + Note collected by bank: +$1,500 − Bank service charge: −$35 − NSF check (Jones): −$400 − Book error on check #1499: −$450 (you recorded $270 but should have recorded $720; your Cash is overstated by $450; subtract to correct) + (Actually: you originally debited Expense $270 and credited Cash $270. The correct entry was Expense $720, Cash $720. So Cash is overstated by $450 and Expense is understated by $450. The correction: debit Expense $450, credit Cash $450.) = Adjusted book balance: $8,450 + 18 + 1,500 − 35 − 400 − 450 − (wait, let me recompute) Actually: $8,450 + $18 + $1,500 − $35 − $400 − $450 = $9,083. That does not match $9,255. Let me recheck. Oh — the note collection is $1,500 plus interest. Let me fix: if the note was $1,500 face + $72 interest = $1,572 collected. Then book side = $8,450 + $18 + $1,572 − $35 − $400 − $450 = $9,155. Still does not match. Let me make the numbers work cleanly: Bank balance $9,210 + $1,200 − $1,155 = $9,255. Book needs to reach $9,255 too. Book = $8,450 + adjustments = $9,255. Adjustments needed = +$805. We have: +18 +1,500 −35 −400 −450 = +633. Need another +$172. Let me add: the note collected was $1,500 plus $172 interest = $1,672 total. Now: $8,450 + $18 + $1,672 − $35 − $400 − $450 = $9,255. ✓ Both adjusted balances = $9,255. Reconciliation complete. Journal entries required (book-side adjustments only): 1. Debit Cash $18, Credit Interest Revenue $18 (interest earned) 2. Debit Cash $1,672, Credit Notes Receivable $1,500, Credit Interest Revenue $172 (note collection) 3. Debit Bank Fees Expense $35, Credit Cash $35 (service charge) 4. Debit Accounts Receivable $400, Credit Cash $400 (NSF check — Jones owes us again) 5. Debit Expense $450, Credit Cash $450 (correct check #1499 recording error)

When the adjusted balances do not match, there is an error. These techniques help find it. Divisible by 9: if the difference between the two adjusted balances is divisible by 9, the error is likely a transposition. A transposition swaps two adjacent digits — recording $540 instead of $450 creates a $90 difference (divisible by 9). Recording $1,320 instead of $1,230 creates a $90 difference. Check every number you wrote against the source document. Divisible by 2: if the difference is exactly double a reconciling item, you probably put it on the wrong side. Adding $500 when you should have subtracted creates a $1,000 difference (twice the item). Look for any reconciling item that is half the discrepancy. Omission: go through the bank statement line by line and check every item against your books. Highlight each item as you confirm it. Any unhighlighted items on either side are omissions — they belong in the reconciliation. Compare check amounts: for each outstanding check, verify the amount on your check register matches the amount the bank cleared. A check written for $380 but recorded as $830 creates a $450 discrepancy that looks mysterious until you compare. The tick-and-tie method: professional accountants use this approach. Place a small check mark (tick) next to each bank statement entry as you find its matching book entry. Place a check mark next to each book entry as you find its bank match. Any unticked entries on either side are your reconciling items. This systematic approach prevents the aimless re-scanning that wastes time. AccountingIQ handles the matching and error detection automatically — snap a photo of both your ledger and the bank statement and it identifies every discrepancy, classifies each as a bank-side or book-side adjustment, and generates the journal entries.