Bank reconciliation, explained with a proper example
Learn how to reconcile a business bank account, find common differences and avoid forcing the books to match with unexplained adjustments.
Bank reconciliation means checking that your accounting records explain the movements and balance on your bank statement. It sounds technical because accountants use a long word for a careful comparison. The work itself is practical. You look at the same account over the same period, match the entries and investigate anything left over. Here is how to approach it without hiding the differences.
Use the same account and the same dates
Start with a complete statement for the account you are checking. Confirm its currency, opening balance, closing balance and date range. Then open the accounting record for that account and period. Do not compare a statement ending on the last day of the month with a live bank balance from this morning. New transactions make those two balances different for a perfectly ordinary reason.
If this is your first reconciliation, check the opening balance too. A difference carried into the month cannot be solved just by reviewing this month's transactions. Ask your accountant where the opening balance came from and whether earlier records need attention. Keep the previous completed reconciliation so you can see where the records last agreed. That gives you a sensible starting point for investigation.
Match the individual movements
Work through the statement and find the corresponding entry in the accounts. Check the amount, date, direction and explanation. A payment and a receipt for the same amount are not interchangeable. One bank deposit can settle several invoices, while several instalments can settle one bill. Follow the underlying documents instead of assuming every bank line needs a separate new expense or sale.
Transfers between your own accounts deserve attention. They should connect the two accounts rather than create customer revenue or a business expense. Both sides need recording, with any actual fee handled separately. If one side appears this month and the other next month, note the timing. The explanation should be supported by statements, not a guess about what probably happened.
A small difference with a clear explanation
Here is an illustrative example using a simplified account with no VAT or timing complications. The statement opens at €2,000, shows a €3,000 customer receipt and a €1,200 supplier payment, then closes at €3,790. Your records show the same opening amount, receipt and supplier payment, but close at €3,800. The €10 difference needs investigation. It is not a reason to overwrite the closing balance.
You find a €10 bank charge on the statement that has not been recorded. After checking its nature and recording it correctly, the account agrees at €3,790. The example works because the adjustment explains a real transaction. If you had merely entered a €10 miscellaneous expense without evidence, the balances might match while the records remained wrong. Matching numbers alone is not the whole job.
Know the usual causes of a mismatch
Look for missing charges, duplicate imports, refunds, transposed amounts and transactions entered into the wrong account. Check whether a payment processor deposited a net settlement after deducting fees. If you recorded the full customer sale, the smaller deposit needs a settlement breakdown. A foreign-currency transaction may also involve conversion and fees. Keep the provider's report so your accountant can assess the treatment.
Some differences concern timing rather than missing entries. Keep a list of legitimate outstanding items and follow them into the next period. Do not leave an old item on that list indefinitely. A payment that never clears, an abandoned cheque or a duplicated entry needs resolution. Record the explanation, evidence and person responsible so the next reviewer does not repeat the same investigation.
Reconcile payment accounts and cards too
A tidy main bank account does not prove that the whole business is reconciled. Cards, marketplace balances and payment processors can hold transactions and money separately. Check each account against its own statement or balance report. For a processor, trace the opening balance, sales, refunds, fees, payouts and closing balance. The payout is one movement within that account, not the complete record of sales.
Cash needs a physical check as well as a record. Count what is actually there and compare it with the cash book. Document shortages or overages and investigate their cause. Avoid topping up the till from your pocket without recording the movement. If several people handle cash, agree who records withdrawals and who checks the count. An unexplained cash balance does not become reliable because it appears in software.
Save the evidence and close the loop
Keep the statement, reconciliation result and list of outstanding items together. Mark the period checked and who reviewed it. Agree how changes to an already reconciled period are handled. An edit to an old transaction can change a balance you previously accepted. Your accountant should be able to explain the effect and preserve a record of the correction.
Use the reconciliation to improve the routine. If every month contains missing processor reports, assign someone to download them. If owner transfers keep being misclassified, agree a clearer reference and treatment. A regular bookkeeping process should leave a short, specific list of questions. It should not rely on a balancing adjustment that nobody can explain when the year ends.
- Compare the same account, currency and period.
- Check the opening balance.
- Match every movement to its explanation.
- Investigate differences before adjusting.
- Save the reconciliation and follow up outstanding items.
This guide explains a working method. It is not personalised tax or legal advice. Confirm the treatment of your own business and current requirements with your accountant and the relevant authority.