Bank Reconciliation

Trust But Verify

🔄 Quick Recall: In the previous lesson, we recorded transactions using debits and credits. But how do you know those records are accurate? That’s where reconciliation comes in.

You’ve been diligently recording every transaction. Your books look clean. But are they actually correct?

By the end of this lesson, you’ll perform a complete bank reconciliation and know how to handle every common discrepancy.

Why Reconcile?

Your bookkeeping records and your bank statement should show the same thing. In practice, they rarely match perfectly. Here’s why:

Timing differences. You wrote a check on the 28th, but the recipient didn’t cash it until the 3rd of next month. Your books show the expense, the bank doesn’t—yet.

Forgotten transactions. Bank fees, automatic payments, interest earned. If you didn’t record them, your books are wrong.

Errors. Typos, wrong amounts, transactions recorded twice or not at all.

Fraud. Unauthorized charges, forged checks, identity theft. Reconciliation is often how fraud gets discovered.

The Reconciliation Process

Step 1: Gather Your Documents

You need two things:

Your bank statement for the period (download from your bank)
Your book balance for the same period (from your ledger or software)

Step 2: Start with the Bank Balance

Take the ending balance on your bank statement. This is your starting point.

Step 3: Add Deposits in Transit

These are deposits you’ve recorded in your books but the bank hasn’t processed yet. Maybe you made a deposit on the last day of the month.

Bank balance + Deposits in transit

Step 4: Subtract Outstanding Checks

These are checks you’ve written and recorded but the recipient hasn’t cashed yet.

Bank balance + Deposits in transit - Outstanding checks = Adjusted bank balance

Step 5: Start with Your Book Balance

Now take the ending balance from your own records.

Step 6: Add Items the Bank Shows That You Missed

Interest earned, refunds, or other credits you haven’t recorded.

Step 7: Subtract Items the Bank Shows That You Missed

Bank fees, service charges, automatic payments, or returned checks.

Book balance + Unrecorded credits - Unrecorded debits = Adjusted book balance

Step 8: Compare

Adjusted bank balance should equal adjusted book balance.

If they match, you’re done. If they don’t, there’s an error somewhere.

✅ Quick Check: Why might your book balance differ from your bank statement balance even when both are correct at their respective recording dates?

A Real Example

Let’s reconcile a month for a freelance designer.

Bank statement ending balance: $8,450

Your book ending balance: $8,175

These don’t match. Let’s find out why.

Bank side adjustments:

Deposit in transit (client payment made Dec 31): +$1,500
Outstanding check #1042 (rent): -$1,200
Outstanding check #1043 (supplies): -$300

Adjusted bank balance: $8,450 + $1,500 - $1,200 - $300 = $8,450

Book side adjustments:

Bank service fee not recorded: -$25
Interest earned not recorded: +$12
Automatic subscription charge missed: -$62
Client’s check returned (bounced): -$350
Error: recorded a $200 expense as $100: -$100

Wait—let’s recalculate. Book balance $8,175 + $12 - $25 - $62 - $350 - $100 = $7,650

That doesn’t match $8,450. So we need to go back and check our numbers. Let me correct the example:

Bank statement ending balance: $7,925

Bank side: $7,925 + $1,500 - $1,200 - $300 = $7,925

Actually, let’s simplify. The bank balance after adjustments: $7,925

Book side: $8,175 + $12 - $25 - $62 - $175 = $7,925

Now they match. Every discrepancy has been identified and accounted for.

Common Reconciliation Items

Item	Where It Appears	What To Do
Outstanding checks	Your books, not bank	Wait—they’ll clear
Deposits in transit	Your books, not bank	Wait—they’ll clear
Bank fees	Bank, not your books	Record the expense
Interest earned	Bank, not your books	Record the income
Automatic payments	Bank, not your books	Record the expense
NSF (bounced) checks	Bank, not your books	Reverse the original deposit
Recording errors	Your books	Correct the entry
Unauthorized charges	Bank, not your books	Dispute with bank immediately

When Numbers Don’t Match

If adjusted balances still don’t match:

Check for transposition errors. If the difference is divisible by 9, you likely swapped two digits (e.g., $540 entered as $450). Difference: $90. Divisible by 9.
Check for omissions. Compare every line on the bank statement to your records.
Check for duplicates. Did you record the same transaction twice?
Check the math. Simple addition errors happen.

Monthly Reconciliation Habit

Set a calendar reminder for the first week of every month:

Download last month’s bank statement
Run through the reconciliation process
Record any missing transactions
Investigate anything unusual
File the reconciliation for your records

Total time: 15-30 minutes for most small businesses. Time saved during tax season: hours.

Using AI for Reconciliation

Export your bank statement and your ledger as CSVs. Then use this prompt:

“Compare these two transaction lists. Identify: (1) transactions in the bank statement but not in my books, (2) transactions in my books but not in the bank statement, (3) any amount differences for matching transactions.”

AI excels at comparing large lists quickly. It can flag discrepancies in seconds that would take you an hour to find manually.

Key Takeaways

Bank reconciliation verifies your books against the bank’s records
Timing differences (outstanding checks, deposits in transit) are normal
Missing transactions (fees, auto-payments) must be recorded
If adjusted balances don’t match, check for transpositions, omissions, and duplicates
Monthly reconciliation takes 15-30 minutes and prevents hours of year-end pain

Up Next

In Lesson 5: Financial Statements, you’ll learn to produce the three reports that tell you exactly how your business is performing.