What is Bank Reconciliation?

Why the two balances differ
How to do a bank reconciliation

A bank reconciliation is a comparison of your bank statement with your own records of the same account, for the same date, that explains every difference between the two balances. Some differences are timing, such as a deposit the bank hasn't recorded yet. Others are items you haven't recorded yet, such as a bank fee, or mistakes on either side. When every difference is explained, the adjusted bank balance and the adjusted book balance are the same amount.

The open textbook Principles of Accounting, Volume 1 from OpenStax defines it as "the internal financial report that explains and documents any differences that may exist between the balance of a checking account as reflected by the bank's records (bank balance) for a company and the company's accounting records (company balance)." It adds that "after the bank reconciliation is prepared accurately, both the bank balance and the company balance will be the same amount" (OpenStax, section 8.6, opened October 29, 2026).

Why the two balances differ

OpenStax lists these reasons a bank statement balance can differ from your records:

Outstanding checks: "a check that was written and deducted from the financial records of the company but has not been cashed by the recipient."
Deposits in transit: "a deposit that was made by the business and recorded on its books but has not yet been recorded by the bank."
Bank service fees, which the bank deducts but you may not have recorded.
Errors by you or by the bank, such as a check recorded for the wrong amount.
Additions such as interest, or funds the bank collected for you.

The first two are adjustments to the bank side, because your records already include them. Fees, interest, collections you didn't know about and your own errors are adjustments to the book side, because your records are missing them or have them wrong. A bank error, such as a check charged to the wrong account, is corrected on the bank side and reported to the bank.

How to do a bank reconciliation

The US Internal Revenue Service's Publication 583 (revised December 2024, opened October 29, 2026) says: "You should reconcile your checking account each month." Its steps, in short:

Check your own figures first. Start with last month's ending balance, "add the total cash deposited during the month and subtract the total cash disbursements," and make sure the result agrees with your records.
Compare deposits. "Compare the deposits listed on the bank statement with the deposits shown in your checkbook."
Compare checks and payments. Mark each one that cleared; "those not marked in your checkbook are your outstanding checks."
Prepare the reconciliation. Adjust the bank balance for deposits in transit and outstanding checks, and adjust your book balance for items the bank recorded that you didn't.
Update your records. Publication 583 says to update your books "for items shown on the reconciliation as not recorded (such as service charges) or recorded incorrectly."

If the adjusted balances still don't match, look for an amount you missed or recorded twice, or ask your accountant.

Sample bank reconciliation

This is a sample with invented figures for a fictional business, Maple Street Design, for its checking account on March 31.

Starting balances

Bank statement balance on March 31: $8,455.00
Book (cash account) balance on March 31: $7,925.00

What the comparison found

A $1,200.00 deposit made on March 31 isn't on the statement (deposit in transit).
Check #1042 for $380.00 and check #1045 for $915.00 haven't cleared (outstanding checks, $1,295.00 in total).
The bank charged a $15.00 service fee.
The bank paid $5.00 of interest.
A client paid a $400.00 invoice by bank transfer, and it isn't in the books yet.
Check #1040 for office supplies cleared for $127.00, but it was recorded in the books as $172.00, so the books show $45.00 too little cash.

Bank side

Bank statement balance: $8,455.00
Add deposit in transit: + $1,200.00 = $9,655.00
Subtract outstanding checks: − $1,295.00 = $8,360.00
Adjusted bank balance: $8,360.00

Book side

Book balance: $7,925.00
Subtract bank service fee: − $15.00 = $7,910.00
Add interest earned: + $5.00 = $7,915.00
Add client payment not yet recorded: + $400.00 = $8,315.00
Add correction for check #1040 ($172.00 recorded − $127.00 cleared): + $45.00 = $8,360.00
Adjusted book balance: $8,360.00

The adjusted bank balance and the adjusted book balance are both $8,360.00, so the account is reconciled.

Journal entries to update the books

Only the book-side items need entries. Each entry's debits equal its credits.

Bank service fee: debit Bank Service Charges Expense $15.00; credit Cash $15.00.
Interest earned: debit Cash $5.00; credit Interest Income $5.00.
Client payment: debit Cash $400.00; credit Accounts Receivable $400.00.
Check #1040 correction: debit Cash $45.00; credit Office Supplies Expense $45.00.

Together these add $435.00 to Cash ($5.00 + $400.00 + $45.00 − $15.00), which takes the book balance from $7,925.00 to $8,360.00. The deposit in transit and the outstanding checks need no entries, because they're already in the books and will clear at the bank.

Records to keep

Publication 583 lists "deposit slips" and "canceled checks" among the supporting documents that "contain information you need to record in your books." Keep each month's bank statement and reconciliation with your records, and ask your accountant how long you need to keep them.

Where Billed fits

Billed's invoice software page says "When a client pays by check or cash, record it as an offline payment so all your income is in one place," and that invoice reports show "which invoices are paid, partially paid or past due." Billed's expense tracking page says an expense "records who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry." Those records can help you identify the deposits and payments you see on your bank statement. The reconciliation itself happens in your accounting records, or with your bookkeeper.

Frequently Asked Questions

When should I reconcile my bank account?

The IRS's Publication 583, revised December 2024, says: "You should reconcile your checking account each month." That's US federal guidance for small businesses. You can also reconcile more than once a month.

What is a deposit in transit?

It's a deposit you've made and recorded in your books that the bank hasn't recorded yet, for example one made after the bank's cutoff on the statement date. You add it to the bank statement balance on the reconciliation.

What is an outstanding check?

It's a check you've written and recorded in your books that hasn't been cashed yet, so the bank hasn't taken the money out of the account. You subtract it from the bank statement balance on the reconciliation.

Do I need journal entries after a bank reconciliation?

Yes, for items the bank recorded that your books don't have yet, such as bank fees, interest, customer payments you didn't know about, returned checks and your own recording errors. Deposits in transit and outstanding checks don't need entries, because they're already in your books.

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What is Bank Reconciliation? A Simple Guide for Small Business