How to Prepare Bank Reconciliation? A Step-by-Step Guide

When it comes to bank transactions, two documents can confirm the bank balance of a company. This first document, or rather a ledger, is the bank book of the company. The bank is an internally prepared document that shows the company’s side of transactions. The company carries over the balance from its bank book to its trail balance and, subsequently, its financial statements. Therefore, the bank book is an important document in the accounting process of a company.

The bank statement, on the other hand, is a document that indicates the bank balance of a company from the bank’s side of transactions. Banks send a bank statement to their customers at the end of each month detailing all the transactions that happened in their bank account during the last month. If a company has more than one bank account in the same or different banks, it will receive multiple bank statements for each account. Similarly, it is a good practice for companies to maintain a separate bank book for each corresponding bank account.

What is Bank Reconciliation?

Bank reconciliation is a part of the internal control process of a company. As mentioned above, two different documents show the bank balance of a company at the end of a specific period. The company prepares the bank book while its bank prepares the bank statements. At the end of the period, there are going to be differences between the balances in both the documents. To reconcile the differences in both balances, the company must prepare a bank reconciliation statement. The process is known as bank reconciliation.

A bank reconciliation statement is a document that compares the bank book balance of a company with its bank statement balance. If there are any differences between the two, the company, through bank reconciliation, can identify those differences. Then, according to the type of difference, the company can adjust it in its bank book or make it a part of its bank reconciliation statement. Companies perform bank reconciliation at regular intervals, usually at the end of each month. It is also recommended that they should carry out a bank reconciliation should at least every month if not any sooner.

What is the Purpose of a Bank Reconciliation?

The main purpose of bank reconciliation is that it plays a vital role in the internal controls of a company. Without bank reconciliation, the bank book balance and bank statement balance of the company will never match. Similarly, without bank reconciliation, the company cannot identify any expenses that the bank may have charged to the bank account. Therefore, the expenses of the company will be misstated and go against the prudence concept of accounting.

More importantly, bank reconciliation can play a crucial role in catching any fraudulent activity. Bank transactions are susceptible to fraud because it involves cash. For example, employees may exploit loopholes in the internal control of a company to their advantage. Therefore, bank reconciliation is the best option that companies have of detecting or sometimes detecting the error before it’s too late.

Apart from fraud, bank reconciliation can also help a company detect errors. Performing regular bank reconciliation can help the company identify any issues within its internal processes related to bank transactions that may result in errors. It can, in turn, help the company improve its bank processes and make them more efficient and effective. Therefore, bank reconciliation can help the company identify any weaknesses within the banking transaction controls.

READ:  Sale-Leaseback Accounting Under ASC 610 and ASC 842 – US GAAP Rules

What to Look for When Preparing a Bank Reconciliation?

There are two main things that companies look for in a bank reconciliation. These are categories of discrepancies that cause a difference in the balances between the balances in the bank book and bank statement. These include timing differences and unrecorded differences.

1. Timing differences

Timing differences are items that cause a difference between the balances in the bank statement and bank book due to the timing of transactions. These differences generally comprise two types of items, outstanding checks, and deposits in transits, also known as outstanding lodgments. An outstanding check is a check that a company pays another party, but the party does not present it to the bank. For example, a company pays its supplier through a check, but the supplier does not take it to the bank before the bank prepares the bank statement.

On the other hand, deposits in transit are the opposite of outstanding checks. Deposit in transit refers to any checks that the company has received from another party, mostly customers. However, it has not presented the check to the bank. Deposits in transit are also checks that the company has presented to the bank, but the check did not clear before the preparation of the bank statement.

The treatment for timing differences in a bank reconciliation is to use them as a reconciling item. There is no accounting treatment for these differences as they will clear with time.

2. Unrecorded differences

Usually, banks charge their customers for the services they provide. These charges may come in the form of bank charges, interest charges, or taxes levied by the government. However, the bank charges these amounts to its customers’ accounts directly. Since the company does not receive the bank statement until the end of the month, it cannot predict these charges or record them. Unrecorded differences are amounts that are present in the bank statement but not present in the bank book are known as unrecorded differences.

The unrecorded differences may have other items as well, such as errors in the bank statement or bank book, dishonored checks, interest received, etc. Unrecorded differences may also include direct debits and standing orders that get automatically charged at a specific date. Similarly, they may consist of deposits that other parties deposit into the bank account without notifying the company. Unrecorded items are different from timing differences as the company needs to record these differences in its bank book as well. Therefore, unrecorded differences will have an accounting treatment.

How to Prepare Bank Reconciliation? Step by Step Approach

Preparing a bank reconciliation requires a company to take a step by step approach. The easiest step by step approach to preparing bank reconciliation is through a 5-step process. If a company has more than one bank accounts, it will need to carry out the process for each account separately. The approach is as follows.

1.   Obtaining both bank statement and bank book balances

The first step in preparing bank reconciliation is to obtain both the bank statement and bank book balances of a company and compare them. If these balances are different, then the company must prepare a bank reconciliation statement. If the balances match, which is rare but still possible, a bank reconciliation statement is not needed.

READ:  Value Added Tax - Is Value Added Tax (VAT) an expense?

2.  Finding the differences between the two documents

The next step in preparing a bank reconciliation statement is to identify the reason for the differences. Usually, there are two categories of differences that may cause differences between the two balances. As mentioned above, these include timing differences and unrecorded differences. The reason why companies must categorize the differences is that the treatment for both is different.

3.  Adjusting unrecorded differences

The next step in the bank reconciliation process is to adjust unrecorded differences. As mentioned above, unrecorded differences require accounting treatment. Therefore, unrecorded differences will change the balance in the bank book of the company. Since these differences alter the balance on the bank book, the adjustments need to take place before further reconciliation takes place.

4.  Reconcile timing differences

As mentioned above, timing differences do not require any adjustments in the bank book balance. Therefore, these items need to be part of the bank reconciliation statement only. They do not require an adjustment to the books of the company. For timing differences, the company must cancel out the effect of outstanding checks and deposits in transit.

5.  Recheck the balances

If the company properly identifies all differences and adjusts them, there should be no remaining difference between the bank book and bank statement balances. If there are still some differences, these may be due to errors in either the two balances or the bank reconciliation process. The company may need to repeat the process until the balance becomes zero, or it identifies any errors.

Example of Bank Reconciliation Statement

A company, ABC Co., receives a bank statement from one of its banks stating the balance in the bank account to be $2,650. On the other hand, the bank balance in the bank book of the company is $3,200. Since both balances are different, bank reconciliation should be prepared. Since the company has already obtained the balance from both the documents, the first step for bank reconciliation is complete.

The next step is to identify any unrecorded differences. The company found that there are $300 bank charges, $250 interest charges, and a $1,000 deposit by a customer, who didn’t notify ABC Co. of the deposit. Since these are all unrecorded differences, ABC Co. must record them in its accounting system. Therefore, the bank book balance would change as follows.

Bank book balance3,200
Bank charges(300)
Interest charges(250)
Deposit by customer1,000
Adjusted bank book balance3,650

The next step is to identify timing differences. The company found there are $3,000 deposits in transit and $2,000 outstanding checks. As mentioned above, deposits in transit are cheques that the bank has not cleared yet. While outstanding checks refer to checks that have been paid by the company but not presented by its suppliers. Therefore, the company must adjust these differences on the bank reconciliation statement.

ABC Co. can start from the adjusted bank book balance and adjust the timing differences to it to reach the bank statement balance. It can also adjust the balances to the bank statement to reach the adjusted bank book balances instead. The adjustment will look as follows.

READ:  Accounting for Exchange of Fixed Assets
Adjusted bank book balance3,650
Deposits in transit(3,000)
Outstanding checks2,000
Bank statement balance2,650

The last step is to recheck the balances. Since the bank statement balance according to the bank reconciliation matches the bank balance in the bank statement, the reconciliation can be considered correct.

How Often Should We do Bank Reconciliation?

A bank reconciliation should be prepared periodically because it is an important part of the internal controls of a company. Usually, most companies prepare bank reconciliations at the end of each month. That is because they receive bank statements at the end of each month. Some small-sized companies prepare bank reconciliations once every 2-3 months. While preparing bank reconciliations regularly is better than preparing it after a couple of months, if the number of bank transactions is low, companies may choose to perform it later.

In short, how often a company should prepare bank reconciliations depends on the level of activity in its bank accounts. For companies with a high number of bank transactions, preparing it every month or, if possible, several times in a month is better. That is because it can help the company detect any irregularities easily and fix them on time. On the other hand, for companies with a low level of bank activity, not preparing bank reconciliations is also an option.

What do You do If a Bank Reconciliation is off by a Very Small Amount?

If a bank reconciliation is off by a very small amount, it is usually due to rounding errors. Similarly, it can also be because the preparer of the bank reconciliation has missed some expense from the bank statement. Generally, it is a good idea to prepare the bank reconciliation again and pay attention to even small amounts and not rounding off figures obtained from the bank statement. It is also a good idea to mark any expenses that have already been included in the bank reconciliation statement to avoid any errors.

For some companies, though, preparing the bank reconciliation again may not be an option. Therefore, if the bank reconciliation is off by a very small amount, the company should try to confirm that the large amounts, especially those caused due to timing differences, are taken correctly. Once these figures are verified, the company can safely assume the error is somewhere in the bank charges or small amounts. Therefore, it can expense out the difference without any consideration to what may have caused it.

While expensing out the missing amount is an option, it is not the recommended approach. That is because bank reconciliation is a crucial part of the internal control process of a business. Even minute discrepancies can be an indicator of other underlying problems. Therefore, it is better if the bank reconciliation is accurate, and there are no missing amounts.


Bank reconciliation is a part of the internal controls of a company. Bank reconciliation plays a crucial role in the internal control process of a company and helps in detecting fraud and error in the process. When preparing a bank reconciliation, the company must look for two types of differences, timing and unrecorded differences. Preparing bank reconciliation requires companies to follow a 5-step process. For most companies, bank reconciliation should be prepared once a month.

Scroll to Top