To do a bank reconciliation, you compare your internal cash records to the bank statement for the same period and then adjust both sides until they match. On the bank side, you add deposits the bank hasn’t processed yet and subtract checks that haven’t cleared. On your books, you record fees, interest, bounced deposits, and any recording errors the statement revealed. When the two adjusted balances agree, the account is reconciled. Most businesses do this monthly, and federal tax law expects your accounting method to clearly reflect income, so consistent reconciliation is not optional bookkeeping hygiene.
What You Need Before You Start
Pull two documents covering the same date range: the bank statement (usually a calendar month) and your internal cash ledger or check register. The statement shows cleared deposits, cleared checks, fees, and an ending balance. Your ledger shows every transaction you recorded, whether or not the bank has processed it.
Working from those two documents, you’ll build two lists by comparing them line by line.
- Deposits in transit: cash or checks you received and recorded but the bank hasn’t credited yet. A deposit made on the last business day of the month almost always lands here.
- Outstanding checks: payments you issued that the recipients haven’t cashed or deposited.
These two lists bridge the timing gap between what your books say and what the bank shows.
Adjusting the Bank Statement Balance
Start with the ending balance on the bank statement. Say the statement shows $10,000.00. That’s your baseline.
Add deposits in transit. If you recorded a $1,250.50 deposit on the last day of the month and it doesn’t appear on the statement, the adjusted figure becomes $11,250.50. The bank simply hasn’t processed those funds yet.
Subtract outstanding checks. If three checks totaling $2,400.00 haven’t cleared, remove that amount. The result, $8,850.50 in this example, is the adjusted bank balance. It represents how much cash will actually be in the account once every pending item clears.
No journal entries are needed for these items. They’re already on your books, and they will appear on next month’s statement.
Adjusting Your Book Balance
Your ledger needs its own corrections for transactions you didn’t know about until the statement arrived. These typically fall into a few categories.
- Bank service fees. Monthly maintenance charges, wire transfer fees, and similar deductions. Standard business checking fees typically run $5 to $25 per month, though wires and specialty transactions cost more. Subtract these from your book balance.
- Interest earned. If the account earns interest, add it to your book balance.
- Returned deposits (NSF checks). When a check you deposited bounces, the bank reverses the deposit and may charge a fee. Subtract both the original deposit and the bank’s fee from your book balance. Under the Uniform Commercial Code, you still have the right to pursue the payer for the original amount and any costs from the failed payment.1Legal Information Institute. UCC 3-418 – Payment or Acceptance by Mistake
- Recording errors. If a check for $540.00 was entered as $450.00, correct the $90.00 difference. Transposition errors are among the most common reconciliation headaches.
Each adjustment should be backed by documentation: the statement, a returned-check notice, or a correcting memo. The total after these changes is your adjusted book balance.
Recording the Journal Entries
Book-side adjustments aren’t finished until you enter them in your accounting system. This is the step people skip most often. When they do, the reconciliation worksheet matches but the general ledger stays wrong.
For bank fees, debit an expense account such as Bank Service Charges and credit cash. That reduces recorded cash and recognizes the expense. For interest earned, debit cash and credit an interest revenue account. That increases recorded cash and captures the income.
For a returned NSF check, debit accounts receivable (because the payer still owes you) and credit cash. If the bank also charged you a return fee, make a separate entry debiting an expense account and crediting cash again.
For recording errors, the correcting entry depends on the original mistake. If you understated a check by $90, credit cash for $90 and debit whichever expense or payable account the check was originally coded to.
The underlying principle is simple. Anything you added to the book balance during reconciliation gets debited to cash. Anything you subtracted gets credited to cash.
Confirming the Match
The reconciliation is complete when the adjusted bank balance and the adjusted book balance are identical. That match confirms every transaction for the period has been accounted for in both systems.
Document the result with a reconciliation report that lists the starting balances, every adjustment on both sides, and the final matching figure. Keep it with your permanent financial records. Lenders and tax examiners both expect to see this if they ever ask.
When the Two Balances Don’t Agree
If the adjusted balances don’t line up, something was missed or entered incorrectly. Before combing through every transaction, try a few shortcuts that experienced bookkeepers rely on.
Check whether the difference is divisible by 9. If it is, you almost certainly have a transposition error somewhere. Digits got swapped: writing $540 as $450 creates a $90 difference, and 90 รท 9 = 10.
Check whether the difference equals the exact amount of a single transaction. If it does, that transaction was probably recorded on one side but not the other, or was counted twice.
Check whether the difference is exactly half the amount of a transaction. If so, someone likely recorded a debit as a credit or vice versa.
Beyond those quick checks, go back to the tick-and-tie process. Compare every cleared item on the statement against your ledger and mark each one off. Whatever remains unmarked on either side is the culprit.
If this is your first reconciliation for a new account, verify the opening balance. A wrong starting point throws off every calculation downstream.
Deadlines If You Spot Unauthorized Activity
Reconciliation is often where unauthorized charges, forged checks, and unauthorized electronic transfers first surface. How quickly you report them matters, because both federal regulation and the UCC set deadlines that shift the loss to you if you miss them.
Unauthorized Check Payments
Under UCC Article 4, you have a duty to review your statements with “reasonable promptness” and notify the bank of unauthorized signatures or alterations. If you fail to report within 30 days and the same bad actor strikes again, the bank can avoid liability for the later forgeries. There is also an absolute outer limit: if you don’t report an unauthorized signature or alteration within one year of receiving the statement, you lose the right to challenge it at all.2Legal Information Institute. UCC 4-406 – Customer Duty to Discover and Report Unauthorized Signature or Alteration
Unauthorized Electronic Transfers
Federal Regulation E sets tighter timelines. Notify the bank within two business days of learning about a lost or stolen access device, and your maximum liability is $50. Wait longer, and the cap rises to $500. If an unauthorized transfer appears on your periodic statement and you don’t report it within 60 days of the statement date, you can be held liable for the full amount of any unauthorized transfers that occur after that 60-day window.3eCFR. 12 CFR 1005.6 – Liability of Consumer for Unauthorized Transfers This is the strongest argument for reconciling every month on time.
How Long to Keep the Records
The IRS requires you to keep records supporting items on your tax return for as long as they remain relevant. For most businesses, that’s three years from the date you filed the return.4Internal Revenue Service. How Long Should I Keep Records The period extends to six years if you underreported income by more than 25% of gross income, and to seven years if you claimed a deduction for bad debt or worthless securities.5Internal Revenue Service. Topic No. 305, Recordkeeping Employment tax records must be kept for at least four years after the tax is due or paid. There is no expiration if you never filed a return or filed a fraudulent one.
Many accountants keep bank reconciliation records for seven years as a safe default, since at filing time you may not know whether a bad-debt deduction or an income understatement will later become relevant. If poor record-keeping does lead to an underpayment, the IRS can impose an accuracy-related penalty of 20% for negligence, defined as a failure to make a reasonable attempt to comply with the tax code.6Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments