To do a bank reconciliation, pull your bank statement and your internal cash ledger for the same period, then adjust each side for items the other doesn’t yet reflect: add deposits in transit and subtract outstanding checks from the bank balance, and add interest and subtract fees, NSF reversals, and errors from your book balance. When both adjusted figures land on the same number, the account is reconciled. If they don’t, the difference points you to a missing entry, a duplicate, or a data-entry mistake.
Most businesses run this process monthly to match the bank statement cycle. Higher transaction volumes sometimes call for weekly or even daily checks.
What You Need Before You Start
Two documents do the work: the bank statement for the period and your internal cash ledger (called a check register or cash book in most accounting software). Pull both for the same date range. Every step that follows comes from comparing these two records line by line.
As you compare them, you’ll see items on one side that don’t appear on the other. Sort them into these categories before you calculate anything:
- Outstanding checks. Payments you’ve recorded that the bank hasn’t processed yet, because the recipient hasn’t deposited or cashed them.
- Deposits in transit. Money you’ve received and recorded but that hasn’t appeared on the statement, common when a deposit lands near the end of the period.
- Bank service charges. Monthly maintenance fees, wire fees, and similar deductions the bank made. Standard business accounts typically run $5 to $25 per month, though premium features cost more.1Bank of America. 8 Common Bank Fees and How to Avoid Them
- Interest earned. Credited by the bank, but you may not have recorded it.
- NSF (non-sufficient funds) checks. Deposits from customers that bounced. The bank reverses the deposit and often charges a fee on top.
List each item on a worksheet with two columns: adjustments to the bank balance on one side, adjustments to your book balance on the other. Getting everything organized before you start the arithmetic saves you from hunting for missing numbers midway through.
The Two-Column Calculation
Reconciliation runs on two parallel tracks. You adjust the bank’s ending balance for things you know about but the bank doesn’t. You adjust your book balance for things the bank knows about but you haven’t recorded. Both adjusted numbers should end up identical.
Adjusting the Bank Balance
Start with the ending balance on the bank statement. Add deposits in transit, because that’s real cash you’ve received. Subtract outstanding checks, because that’s real cash you’ve already committed. The result is your adjusted bank balance.
Say the statement shows $12,400, you have $800 in deposits in transit, and $1,500 in outstanding checks. Your adjusted bank balance is $11,700.
Adjusting the Book Balance
Start with the ending cash balance from your ledger. Add any interest the bank credited that isn’t on your books. Subtract service fees, NSF check amounts, and any other bank charges you didn’t know about until the statement arrived. The result is your adjusted book balance.
If your ledger shows $11,900, the bank credited $15 in interest, and you owe $30 in service fees plus a $185 NSF reversal, your adjusted book balance is $11,700. That matches the adjusted bank balance, so the reconciliation is done.
When the Balances Still Don’t Match
If the two adjusted balances aren’t equal, something got recorded wrong or missed entirely. This is where most of the real work lives.
Start by checking whether the difference divides evenly by 9. If it does, you almost certainly have a transposition error, where two digits got swapped during data entry. Recording $540 as $450 creates a $90 discrepancy, and 90 divides by 9. A slide error, meaning a misplaced decimal point (entering $35.00 as $350.00 or $3.50), produces the same divisible-by-9 fingerprint.
If the difference isn’t divisible by 9, work through these possibilities:
- Omitted transactions. A check or deposit that appears on one record but not the other. Compare each line individually.
- Duplicate entries. The same transaction recorded twice in your books, doubling its effect on your balance.
- Amount mismatches. A payment recorded at the wrong dollar figure. Check the transfer confirmation or the check itself against what you entered.
- Prior-period carryover. An unresolved difference from last month compounds with this month’s items. Verify that the previous month balanced before spending hours on the current one.
When the discrepancy is small and you’ve run out of leads, don’t force a match with a “miscellaneous adjustment.” That buries the problem and it will resurface later, often during an audit.
Recording the Journal Entries
Once your adjusted balances match, record journal entries for every item on the book side of the worksheet. The bank-side adjustments clear on their own as checks are cashed and deposits post, so they need no entry. The book-side items are real changes to your cash position that your accounting system doesn’t yet know about.
- Bank service fees. Debit the relevant expense account (bank charges, office expense) and credit cash.
- Interest earned. Debit cash and credit interest income.
- NSF checks. Debit accounts receivable, because the customer still owes you, and credit cash. Follow up separately to collect.
- Error corrections. The entry depends on what went wrong. If you recorded a $350 payment as $530, debit cash and credit the expense account for the $180 difference.
Skip these entries and your cash balance stays wrong. Any financial statements or decisions built on that number start from a flawed foundation. Post the entries while the reconciliation details are still fresh.
How Often to Reconcile
Monthly is the baseline for most businesses. It matches the bank statement cycle and keeps discrepancies small enough to trace. Wait longer than a month and the pool of transactions grows while memory of individual entries fades.
Businesses processing dozens of transactions a day through multiple payment channels benefit from weekly reconciliation. A month’s worth of unreconciled activity in that setting becomes a daunting pile, and weekly checks keep it manageable.
Cash-heavy operations or those with elevated fraud risk sometimes reconcile daily. Medical practices handling insurance payments, retail stores with large amounts of physical cash, and businesses where multiple people touch money all fit this pattern. Catching a $500 discrepancy on day one is far easier than finding it buried in 30 days of activity.
Handling Checks That Never Clear
Outstanding checks that carry over month after month need attention. Under the Uniform Commercial Code, a bank has no obligation to honor a check presented more than six months after its date, though it may still choose to pay it in good faith.2Legal Information Institute. UCC 4-404 – Bank Not Obliged to Pay Check More Than Six Months Old Past that point you’re carrying a liability on your books for a payment that may never clear.
There’s a further issue: state unclaimed property law. Every state requires businesses to report and eventually turn over funds from uncashed checks after a specified dormancy period. Payroll checks can carry a dormancy period as short as one year. Vendor checks typically run three to five years, depending on the state.3U.S. Department of Labor. Introduction to Unclaimed Property
The practical rule: flag any check outstanding for more than 90 days during reconciliation and contact the payee. Either they lost the check and need a replacement, or they don’t intend to cash it. Resolving stale checks early avoids the paperwork and legal exposure that come with the escheatment process.