Bank reconciliation
Also known as: bank reconciliation statement
A bank reconciliation is the process of comparing a company's cash book balance to its bank statement balance and explaining every difference between them, such as outstanding checks, uncleared deposits, bank charges, and errors.
A bank reconciliation compares the cash balance in a company's own records (the cash book or bank ledger account) with the balance shown on the bank statement at the same date. The two figures rarely match, and the reconciliation identifies and explains every difference — proving that the company's cash records are complete and accurate.
Differences fall into two groups. Timing differences are items recorded by one party but not yet the other: outstanding (unpresented) checks the company has written that haven't cleared the bank, and deposits in transit (outstanding lodgements) recorded in the cash book but not yet credited by the bank. These require no correction — they adjust the bank statement balance. Items requiring cash book updates are things the bank knows first: bank charges, interest earned or charged, direct debits and standing orders, dishonored (bounced) checks, and any errors in the company's own records.
The mechanics run in two steps. First, update the cash book for the items it's missing, producing a corrected cash book balance. Second, take the bank statement balance, add deposits in transit, and subtract outstanding checks. If both adjusted figures agree, the reconciliation is complete; if not, an error is still hiding somewhere. Performed regularly, the reconciliation is also a key internal control for detecting fraud and mistakes.
Bank reconciliations are a staple of the ACCA Financial Accounting (FA) exam, which tests both the adjustment mechanics and which side — cash book or bank statement — each reconciling item belongs to.
Key takeaways
- A bank reconciliation explains every difference between the cash book balance and the bank statement balance.
- Timing differences (outstanding checks, deposits in transit) adjust the bank statement side and need no correction.
- Bank charges, interest, direct debits, dishonored checks, and cash book errors require updating the company's cash book.
- Regular reconciliations serve as an internal control against errors and fraud.