A bank reconciliation explains the difference between the bank statement balance and the cash balance in the books at a specific date. It identifies timing items, bank activity not yet recorded, errors, stale items, and possible fraud before they distort reporting or cash decisions.
Bank-side and book-side items
| Item | Typical side | Normal treatment |
|---|---|---|
| Deposit in transit | Bank | Add to bank balance |
| Outstanding check | Bank | Subtract from bank balance |
| Bank fee | Books | Record expense and reduce cash |
| Interest or collection | Books | Record income or receivable settlement |
| NSF customer payment | Books | Reverse cash and restore receivable as appropriate |
| Error | Source that is wrong | Correct or pursue the responsible party |
Worked example
Bank statement ending balance is $24,900. Deposits in transit are $3,200 and outstanding checks are $2,450:
Adjusted bank balance = $24,900 + $3,200 − $2,450 = $25,650.
Book balance is $25,820. The bank charged a $70 fee and returned a $100 customer payment:
Adjusted book balance = $25,820 − $70 − $100 = $25,650.
Both adjusted balances agree. The company records the book-side items, subject to account-specific review. Timing items do not normally create a journal entry merely because they appear on the bank side.
Monthly process
- Obtain the statement directly and lock the ledger period.
- Confirm opening balances agree with the prior approved reconciliation.
- Match deposits, withdrawals, checks, transfers, and fees.
- List unmatched items with date, amount, owner, and explanation.
- Investigate duplicates, altered payees, unusual transfers, and old checks.
- Post and approve valid book corrections.
- Confirm adjusted balances agree exactly.
- Complete independent review and preserve evidence.
Fraud and control warning signs
- Unexplained reconciling items carried month after month
- Deposits recorded near period-end but never reaching the bank
- Checks with changed payee, amount, or endorsement
- Transfers between accounts used to conceal timing
- One person controls bank access, entries, and reconciliation
- Statement received from the preparer instead of the bank
Handling stale checks
Do not automatically reverse an old outstanding check into income. Confirm whether the obligation remains, contact the payee appropriately, review unclaimed-property law, stop or reissue the payment, and document the decision.
For close-wide governance, use the account reconciliation workflow and reflect verified cash in cash management.
Frequently asked questions
How often should bank accounts be reconciled?
At least each reporting period; high-volume or high-risk accounts may require daily or weekly monitoring.
Do outstanding checks need journal entries?
Normally they were recorded when issued, so the reconciliation adjusts the bank side. Stale or erroneous items need separate analysis.
Can software complete reconciliation automatically?
It can match transactions, but humans must validate completeness, rules, exceptions, and suspicious activity.
Sources reviewed
Last reviewed: August 15, 2026. The example is simplified and does not replace accounting policy or unclaimed-property advice.