Bank reconciliation: how to do it step by step

Bank reconciliation: how to do it step by step

The bank statement says one thing and the bank subledger says another. Most of the time that gap is not a serious error: it is an item that was left behind. Bank reconciliation means explaining every one of those differences with a supporting document, one by one, until both balances reach the same number. Done well, it surfaces money that had been lost from sight, receipts nobody recorded and fees nobody authorized. Done badly, the difference gets “adjusted” and the problem is buried. What follows is the full procedure: the items that come back every month, the reconciliation table, the adjusting entries and the internal controls that keep the whole thing from becoming office theater.

What reconciling means and what it does not

Reconciling is comparing the bank statement with the bank subledger and explaining each difference with a document. Nothing more. The output is not a pretty balance: it is a list of items, each with its support, and a final balance both sides share.

Three things get mixed up in practice. Balancing means making two numbers match; you get there by erasing or “adjusting”, and it proves nothing. Reconciling means explaining why they did not match: it leaves a trail, support and names. Auditing means checking whether the previous work was done properly, and it comes later.

A reconciliation is not an accounts receivable report or an expense summary either. The bank owes you nothing and will not fix your books: it only records what moves through the account. The control is yours. And it has a concrete deliverable: a dated working paper with the statement balance, the book balance, the list of items and the reconciled balance. If that paper does not exist, you do not have a reconciliation: you have an opinion.

Why the bank and the books never match on their own

Because they record at different moments. The bank posts when the money moves; the company posts when it learns about the transaction. A check written on the 28th and cashed on the 4th of the following month shows up in the books in the first month and on the statement in the second. Neither side is wrong: they run on different clocks.

Four things widen the gap further:

• Charges the bank takes on its own: fees, account maintenance, GMF, automatic debits for loans and insurance.
• Interest and credits the bank posts at cut-off that the company only learns about when it sees the statement.
• Third-party movements and bank errors: a deposit that is not yours, a duplicate debit, a returned check.
• Cut-off mismatches: if the bank closes on the 30th and your accounting close is the 31st, the last day falls outside both sides.

Hence the rule that organizes everything else: the difference is not the problem; an unexplained difference is.

The reconciling items that come back every month

These are the ones that show up almost always in a small business. If one of them is missing from your table, check whether you are overlooking it: the items nobody looks for are the ones that pile up.

The middle column is where most mistakes happen. An uncashed check leaves the statement above the books; a deposit in transit leaves it below. Flip those two signs and the table may “close” by accident while explaining two errors.

The two methods and why they reach the same number

There are two valid routes. Route A starts from the statement balance and adjusts it until it reaches the book balance. Route B starts from the book balance and adjusts it to the statement. In practice both are brought to a meeting point: the reconciled balance.

The method does not change the result; it changes the order in which you think. Route A is faster when the gap sits in a few bank items. Route B helps when you suspect the error is in how the books were keyed, because it forces you through what the company recorded.

Three things matter: the final balance must be the same on both routes, every item must have a name and an amount, and the sign must be right. If the routes disagree, do not recheck the addition: look for the item that is duplicated or missing. Arithmetic is almost never the problem. And pick one method for every month: switching routes makes one period impossible to compare with another.

Step by step: from the statement to the reconciled balance

The procedure is the same for one account or five. Only the time changes, not the logic.

1. Set the cut-off date and make it match the accounting close. If the bank closes on a different day, request the statement at the closing date or record the overlap explicitly. Half an hour here prevents an eternal difference.
2. Download the statement from the bank's portal: opening balance, every movement in the period and closing balance. Save the PDF and, if possible, the transaction file.
3. Close the bank subledger to the same date and check that its opening balance equals last month's reconciled balance. If it does not, the problem started earlier.
4. Match line by line: each statement line against its book entry, and each entry against its line. What matches gets marked and is not looked at again.
5. Whatever is left unmatched is your item list. Classify it with the table above: name, amount, side and date.
6. Get support for each item: the delivered check, the deposit slip, the fee invoice, the interest certificate. An item without support is an assumption.
7. Build the table, add it up and confirm both routes land on the same balance. Zero difference or it is not finished.
8. Record the adjusting entries in the books, each with its entry and its document. Items in transit are not adjusted: they stay pending and get watched.
9. Sign it, file it, and carry the pending items forward in an annex. Next month's reconciliation starts by checking whether those items cleared.

With practice, an account with eighty monthly movements takes one to two hours. If it takes three days, you are doing by hand what the system should hand you already matched.

A full example with five items

Let us close October for a trading company. The bank subledger shows $12,450,000 at October 31. The statement at the same cut-off shows $12,866,000. The gap is $416,000 and five items explain all of it.

Read the table in both directions and every line explains itself:

• Check for $800,000. Delivered on the 27th and not cashed before cut-off. It is out of the books and still on its way through the bank: that is why the statement is above and the check gets subtracted.
• Deposit for $350,000. Made late on the 30th and credited by the bank on the 1st. It is in the books and not on the statement, so it is added to the statement.
• Fee of $45,000 and GMF of $12,000. The bank charged them and the company never recorded them. The statement already took them out; they get subtracted from the books.
• Interest of $23,000. Credited at cut-off and recorded by nobody. It is added to the books.

Both checks, with the arithmetic in plain sight. Route A: 12,866,000 − 800,000 = 12,066,000; 12,066,000 + 350,000 = 12,416,000. Route B: 12,450,000 − 45,000 = 12,405,000; 12,405,000 − 12,000 = 12,393,000; 12,393,000 + 23,000 = 12,416,000. Both routes land on the same peso.

Note what was not done: neither the check nor the deposit was touched in the books. They were already recorded, and adjusting them would have doubled the movement and created a fresh difference next month.

The adjusting entries almost nobody records

Of the five items, only three produce an entry: the fee, the GMF and the interest. The other two are not adjusted because the bank has not processed them yet. Posting an entry for a check in transit subtracts the same expense twice.

After both entries the subledger sits at $12,416,000 and matches the reconciled balance. The statement is not corrected: it is a bank document and takes no entries. If the bank made a mistake, you file a claim.

Two warnings. GMF is not just another bank charge: it has its own tax treatment, it goes in its own account, and it is treated as deductible only to the extent the current rule allows, so confirm this year's criterion with your accountant. And interest is financial income, not a reduction of the bank charge: blending them distorts two lines of the income statement at once.

GMF, fees and other charges that slip by

GMF is a levy of 4 per 1,000 on financial transactions. It is charged per movement, not per month, which is why it shows up dozens of times on the statement of an account with active collections. It is the most frequently omitted item: each line looks trivial and nobody keeps the fee schedule in view.

Other recurring charges live next to it: account maintenance, checkbooks, card terminal commission, transfers, cash withdrawals, certifications. Each is small; together they are a line nobody budgeted. And if they are not recorded month by month, the difference does not vanish: it accumulates.

A different group needs more care: movements that are not the business's. A third party's deposit into the wrong account, a check returned for insufficient funds, a duplicate bank debit, a collection that came in unidentified. Posting any of these to an expense account without investigating has two consequences: the income statement lies and the claim against the bank is lost, because claim windows are not eternal. The statement is not revealed truth: it is a record that makes mistakes too.

And one item almost nobody looks for: automatic debits for loans and insurance. They charge themselves, they announce nothing, and they are often recorded at the budgeted amount rather than the amount charged.

How often to reconcile, by type of business

The general rule is monthly at a minimum, always at each accounting period's close. But the minimum is not the same for everyone: there are businesses where one month of waiting turns reconciliation into an investigation.

A reconciliation from three months ago is no longer a reconciliation: it is archaeology. Items in transit become hard to trace, checks go stale, claim windows against the bank close. The value lies in proximity to the event, not in the neatness of the form.

Who reconciles, and why it should not be the person handling the money

Whoever writes checks, makes deposits or authorizes payments should not be the one reconciling. This is not personal distrust: the person who could hide a shortage cannot be the person certifying there is none. In a small company there is sometimes no one to rotate with, and then the control is replaced by other rules: the owner or the accountant reviews and signs, every item above a defined amount requires a document, and differences are explained in writing before they are adjusted.

A reconciliation should carry two signatures: the preparer's and the reviewer's. And it should be filed with its annexes: it is the proof that the balance on the financial statements existed.

Mistakes that turn reconciliation into a pointless ritual

The mistakes are not conceptual: they come from hurry. These are the ones you see over and over.

• Adjusting the difference against an expense account. The most expensive one. A $416,000 adjustment to “sundry” is not a close: it is a decision not to know. It hides a shortage, distorts the month's result and, if there was an unauthorized withdrawal, turns it into an expense nobody will ever look at again.
• Reconciling against the portal balance. The portal shows today's balance, not the cut-off balance. If the date does not match, the table can close for one day and never again.
• Leaving items in transit for months. A six-month-old check has probably gone stale, and if the payee cashes it later the expense appears twice. A deposit that never arrived has a claim window, and the window runs from the statement.
• Not recording fees or GMF because they are small. Over a year they are a real expense and a difference nobody can trace anymore.
• Duplicating a movement and fixing it next month with another error. Every correction without support leaves a trail nobody can rebuild later.
• Reconciling without support. The table exists and the numbers tie, but nobody can prove a single item. In a review or in front of a partner, that reconciliation is worth nothing.
• Doing it the same day the tax return is due. In a rush you adjust what you do not understand, and the adjustment stays forever.

An honest close before you decide

This does not replace your accountant. Reconciliation is an operating control, not an opinion: it identifies differences, not their tax treatment, and decisions on GMF, financial income or receivables write-offs need professional judgment.

If your company runs several accounts, several currencies, gateway collections or more than three hundred movements a month, the manual table falls short. There, reconciliation needs the system to pull the bank movements and match them against your records, so you only review exceptions.

And if the difference is still there after you have reviewed the five items, do not adjust it. Ask the bank for the transaction detail and check whether there is an unauthorized charge. A difference that survives analysis is information, not a nuisance.

If you run inventory, invoicing and accounting in one system —Kardex Tauro, for instance—, the bank subledger feeds on the movements you already recorded, and reconciliation stops being a reconstruction and becomes a verification.

Keep reading

• Accounting entries: what they are, types and examples
• Cash flow forecast: how to build one and what it changes