What is a bank reconciliation? Definition and a step-by-step walkthrough
A bank reconciliation proves your book cash balance matches the bank statement. What it is, how to do one step by step, and a worked example.
Part of the payment reconciliation and cash application guide.
A bank reconciliation is the process of comparing the cash balance in your general ledger with the balance on your bank statement for the same date, explaining every difference, and correcting your books where they are wrong. When the adjusted bank balance equals the adjusted book balance, the account is reconciled. If they don't agree, something is missing, duplicated, or mis-keyed, and you find it before your auditors do.
This guide explains what a bank reconciliation is, why it matters for your close, and how to do one step by step. It ends with a worked example that includes deposits in transit, outstanding checks, bank fees, a returned check, and a transposition error, plus the journal entries each one needs.
Key takeaways
• A bank reconciliation proves that the cash in your books matches the cash in the bank, after adjusting for items one side has recorded and the other hasn't yet.
• Differences fall into two groups. Bank-side items (deposits in transit, outstanding checks) need no journal entry. Book-side items (fees, interest, returned checks, errors) do.
• The process has a fixed order: start from both ending balances, match transactions, list reconciling items, compare the adjusted balances, then post the book-side entries.
• Reconcile at least monthly, before you close the period. High-volume accounts benefit from daily matching so month-end holds only the exceptions.
• A reconciliation is a control, not just a tie-out. It needs a preparer, a reviewer, a date, and retained evidence.
• Loopfour, the deterministic finance workflow automation platform, runs the matching step the same way every day and routes only the unmatched items to a person for approval.
What is a bank reconciliation?
A bank reconciliation is a comparison between your cash account in the general ledger and your bank statement that identifies, explains, and resolves every difference between the two balances. The output is a short schedule that starts with each balance, lists the reconciling items, and ends with two adjusted balances that agree.
The two balances rarely match on their own. Your books record a check the day you write it; the bank records it the day it clears. The bank deducts a service fee you haven't booked yet. A customer's check bounces. Each of these is a timing difference or a recording gap, and the reconciliation's job is to separate the two so timing differences are tracked and genuine errors are fixed.
Bank reconciliation is one kind of reconciliation. Payment reconciliation, which ties processor payouts such as Stripe to your ledger, follows the same logic across more systems. See what payment reconciliation is and why it breaks as you scale for that side.
Why does a bank reconciliation matter?
A bank reconciliation matters because cash is the one balance that every other account eventually flows through, and it is the easiest place for errors and fraud to hide. An unreconciled cash account means your revenue, your AR, and your AP can all be wrong without anyone noticing.
| What a reconciliation catches | Example |
|---|---|
| Unrecorded bank activity | Service fees, interest, automatic debits |
| Recording errors | A $540 check entered as $450 |
| Duplicates | The same customer receipt posted twice |
| Returned items | A customer check returned for insufficient funds |
| Unauthorized activity | A payment you never approved clearing the account |
| Stale items | A check outstanding for months that the bank is no longer obliged to pay |
On that last row: under the Uniform Commercial Code §4-404, a bank is under no obligation to pay a check, other than a certified check, that is presented more than six months after its date. Old outstanding checks are therefore worth investigating rather than carrying forever.
Your auditors will ask for reconciliations as evidence that cash is complete and accurate. A signed, dated reconciliation for each account and each period is standard close documentation, and it belongs on your month-end close checklist.
The reconciling items: bank side vs book side
Every difference between the bank balance and the book balance belongs on one side of the reconciliation. Where it goes determines whether you post a journal entry.
| Item | Side | Adjustment | Journal entry needed? |
|---|---|---|---|
| Deposit in transit | Bank | Add to bank balance | No |
| Outstanding check | Bank | Subtract from bank balance | No |
| Bank error | Bank | Add or subtract; ask the bank to correct | No |
| Bank service fee | Book | Subtract from book balance | Yes |
| Interest earned | Book | Add to book balance | Yes |
| Returned (NSF) customer check | Book | Subtract from book balance | Yes |
| Electronic receipt not yet booked | Book | Add to book balance | Yes |
| Book recording error | Book | Add or subtract to correct | Yes |
A deposit in transit is cash you have recorded and deposited that the bank has not yet credited. It usually clears within a few business days.
An outstanding check is a check you have issued and recorded that the payee has not yet cashed or the bank has not yet cleared.
The rule of thumb: if the bank will catch up on its own, adjust the bank side. If your books need to catch up, adjust the book side and post an entry.
How to do a bank reconciliation, step by step
To do a bank reconciliation, start from the ending balance on the bank statement and the ending balance in your ledger, match every transaction, list what doesn't match on the correct side, and confirm the adjusted balances agree. The steps below work in any ledger, from QuickBooks to NetSuite to a spreadsheet.
1. Gather the statement and the ledger detail
Pull the bank statement for the period and the general ledger detail for the cash account, for the same end date. Confirm the opening balance on the statement equals the ending balance on your last completed reconciliation. If it doesn't, stop and fix that first: something in a prior period changed.
2. Record both ending balances
Write down the statement ending balance and the ledger ending balance. These are the two starting points of the schedule. In QuickBooks Online, Intuit's reconcile screen asks for the statement's ending balance and ending date before you start matching.
3. Match deposits
Tick off every deposit that appears in both the ledger and the statement. Deposits in your ledger that are not on the statement are candidate deposits in transit. Deposits on the statement that are not in your ledger are candidate unrecorded receipts.
4. Match withdrawals and checks
Do the same for checks, ACH debits, wires, and card settlements. Checks in your ledger that have not cleared are outstanding checks. Debits on the statement that are not in your ledger, such as fees or automatic payments, are book-side items.
5. Adjust the bank balance
Start with the statement balance. Add deposits in transit, subtract outstanding checks, and correct any bank errors. The result is the adjusted bank balance.
6. Adjust the book balance
Start with the ledger balance. Add interest and unrecorded receipts, subtract fees and returned checks, and correct recording errors. The result is the adjusted book balance.
7. Compare the adjusted balances
The two adjusted balances must be equal. In QuickBooks Online, this is the point where the Difference field reads $0.00. If there is still a difference, go back to matching; our guide to why a bank reconciliation won't balance orders the usual causes by likelihood.
8. Post the book-side journal entries
Record an entry for every book-side item. Bank-side items need no entry, because the bank will catch up. After posting, your ledger cash balance equals the adjusted book balance.
9. Review, sign, and retain
A second person reviews the schedule, the supporting statement, and the entries. The preparer, reviewer, and dates go on the record. Then lock the period so no one can backdate a change into it; see how to lock accounting periods.
Worked example: an August bank reconciliation
Here is a complete bank reconciliation for an operating account at August 31. The statement shows an ending balance of $48,250.00. The general ledger shows $45,610.00.
When you match transactions, you find:
• A deposit of $6,400.00 recorded on August 31 that the bank credited on September 2 (deposit in transit).
• Check #1187 for $2,150.00 and check #1190 for $3,875.00, both issued in late August and not yet cleared (outstanding checks).
• Interest of $35.00 and a monthly service fee of $45.00 on the statement, neither booked.
• A customer check for $1,200.00 returned for insufficient funds (NSF).
• Check #1182 to a vendor, which cleared at $450.00 but was entered in the ledger as $540.00 (a transposition error).
• A customer ACH receipt of $4,135.00 on the statement that nobody recorded.
| Bank side | Amount | Book side | Amount |
|---|---|---|---|
| Balance per bank statement | $48,250.00 | Balance per general ledger | $45,610.00 |
| Add: deposit in transit | $6,400.00 | Add: interest earned | $35.00 |
| Less: outstanding check #1187 | ($2,150.00) | Add: unrecorded customer ACH | $4,135.00 |
| Less: outstanding check #1190 | ($3,875.00) | Add: correction of check #1182 ($540 recorded, $450 cleared) | $90.00 |
| Less: bank service fee | ($45.00) | ||
| Less: NSF customer check | ($1,200.00) | ||
| Adjusted bank balance | $48,625.00 | Adjusted book balance | $48,625.00 |
Both sides adjust to $48,625.00, so the account is reconciled. Now post the book-side entries. The bank-side items clear on their own in September.
| Entry | Account | Debit | Credit |
|---|---|---|---|
| Interest | Cash | $35.00 | |
| Interest income | $35.00 | ||
| Customer ACH | Cash | $4,135.00 | |
| Accounts receivable | $4,135.00 | ||
| Check #1182 correction | Cash | $90.00 | |
| Accounts payable (or the original expense account) | $90.00 | ||
| Service fee | Bank fees expense | $45.00 | |
| Cash | $45.00 | ||
| NSF check | Accounts receivable | $1,200.00 | |
| Cash | $1,200.00 |
After these entries, the ledger shows $45,610.00 + $35.00 + $4,135.00 + $90.00 − $45.00 − $1,200.00 = $48,625.00, which matches the adjusted bank balance. The $90.00 transposition difference is divisible by nine, a classic sign of two swapped digits.
How often should you reconcile your bank accounts?
Reconcile every bank account at least monthly, before you close the period. Monthly is the floor, not the target, for accounts with real volume.
| Account profile | Suggested cadence |
|---|---|
| Low-volume account, a few dozen transactions a month | Monthly, at close |
| Operating account with daily customer receipts | Weekly or daily matching, formal sign-off monthly |
| Accounts fed by payment processors (Stripe, PayPal) | Daily matching of payouts to deposits |
| Many accounts across entities or clients | Daily automated matching, exceptions reviewed daily |
Daily matching turns month-end reconciliation into a review of a short exception list instead of a multi-day hunt through hundreds of lines.
Manual vs automated bank reconciliation
Manual reconciliation is accurate when volume is low and slow when it isn't. Automation handles the matching; people handle the judgment.
| Step | Manual | Deterministic automation |
|---|---|---|
| Pull statement and ledger | Download and export each period | Bank feed and ledger read on a schedule |
| Match transactions | Tick boxes line by line | Predefined rules on amount, date window, and reference |
| Handle unmatched items | Investigated at month-end | Routed as exceptions the day they appear |
| Post book-side entries | Keyed by hand | Drafted by rule, posted after approval |
| Evidence | Spreadsheet and a signature | Execution tree showing every match, rule, and approver |
Loopfour runs this as a workflow on the Loopfour Studio canvas: bank feed → match against NetSuite, QuickBooks, or Xero → clear confident matches → route exceptions to Slack for approval → post approved entries. Matching rules are deterministic, so the same inputs produce the same matches every run. We build and maintain the workflow on your existing stack. For the full playbook, read how to automate bank reconciliation at scale.
Book a workflow review to see your own bank reconciliation mapped as a workflow.
How to choose a bank reconciliation approach
Choose based on volume and on how much audit evidence you need, not on how modern the tool looks. A single low-volume account reconciles perfectly well in your ledger's built-in tool.
Your ledger's reconcile screen is the right answer for small volumes. It is clear, it is native, and it keeps the reconciliation next to the data. Horizontal automation tools and scripts add flexibility and connect almost anything, but someone on your team owns them when a bank changes its export format.
Deterministic, finance-specific automation is the right answer when volume, account count, or audit pressure grows. A script matches what it can and leaves no trace of why. Loopfour applies predefined matching rules, holds anything it cannot match, and records who approved each exception, so your reviewer signs off on evidence rather than on trust.
Frequently asked questions
What is a bank reconciliation in simple terms? A bank reconciliation is a check that the cash balance in your accounting records matches your bank statement. You list the items that explain any difference, such as uncleared checks or unrecorded fees, and fix your books where they are wrong. When the adjusted balances agree, the account is reconciled.
What are the steps in a bank reconciliation? Gather the bank statement and ledger detail, record both ending balances, match deposits and withdrawals, adjust the bank balance for deposits in transit and outstanding checks, adjust the book balance for fees, interest, returned checks, and errors, then confirm both adjusted balances agree. Finally, post the book-side journal entries and have a second person review.
Which items need a journal entry in a bank reconciliation? Only book-side items need a journal entry: bank fees, interest earned, returned (NSF) checks, unrecorded electronic receipts or payments, and your own recording errors. Deposits in transit and outstanding checks need no entry because the bank records them when they clear.
What is the difference between a deposit in transit and an outstanding check? A deposit in transit is money you have recorded and deposited that the bank has not yet credited, so you add it to the bank balance. An outstanding check is a payment you have recorded that has not yet cleared the bank, so you subtract it from the bank balance.
How often should a business do a bank reconciliation? At least monthly, before closing the period, for every bank account. Businesses with high transaction volume or processor payouts benefit from matching daily or weekly so month-end holds only exceptions.
Can bank reconciliation be automated? Yes. The matching step is rule-based and automates well: bank transactions are matched to ledger entries by amount, date window, and reference. Loopfour runs that matching deterministically and routes unmatched items to a person for approval, so the reviewer still signs off.
Conclusion
A bank reconciliation is the simplest proof that your cash is real: two balances, a list of explained differences, and a set of entries that bring your books up to date. Do it in a fixed order, keep bank-side and book-side items separate, and make sure someone other than the preparer signs off. Once the matching runs daily and deterministically, month-end bank reconciliation becomes a review, not a project.
Tell us the one workflow your team dreads. We will show it running: deterministic, permissioned, and auditable.
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Sources
• QuickBooks Online Help: Reconcile an account in QuickBooks Online
• Uniform Commercial Code §4-404, Cornell Law School Legal Information Institute
Related reading
• Why your bank reconciliation won't balance: the causes and how to find each one
• How to automate bank reconciliation at scale
• What is payment reconciliation? The definition, and why it breaks as you scale
• The month-end close checklist: every step, owner, and control
• How to lock accounting periods so backdated edits can't unreconcile your books
Sources
- Intuit QuickBooks, Reconcile an account in QuickBooks Online (opens in a new tab).