Before You Start

This guide assumes you have your bank statement for the period and access to the corresponding bank account in your accounting software (e.g., QuickBooks, Xero).

Overview

25 min
Setup Time
Basic
Difficulty
Monthly
Maintenance

What You’ll Learn

  • Understanding the purpose of bank reconciliation
  • Step-by-step process to match and clear transactions
  • Identifying and resolving common discrepancies
  • Finalizing and reporting your reconciliation

1. Preparation Steps

Ensuring you have the right documents and account setup is crucial for a smooth reconciliation.

Key Documents & Access

  • Bank statement (for the period)
  • Access to accounting software (QuickBooks, Xero, etc.)
  • Prior month’s reconciliation report (if available)

Accounting Setup Checks

  • Bank account balance in software matches previous month’s ending balance
  • All prior month’s reconciling items have cleared
  • No unrecorded transactions from previous periods

2. Understanding Key Concepts

Before diving in, let’s clarify some essential terms.

Concept A: Deposits in Transit

These are funds received and recorded by your business but not yet processed by the bank.

Significance:
  • Increases book balance.
  • Common timing difference.
  • Usually clears within days.
Challenges:
  • Requires tracking.
  • Can be missed if not reconciled promptly.
  • Potential for errors if amounts differ.

Concept B: Outstanding Checks

These are checks written and recorded by your business but have not yet been presented to or cleared by the bank.

Significance:
  • Decreases book balance.
  • Another common timing difference.
  • Can stay outstanding for weeks.
Challenges:
  • Can expire if not cashed.
  • May need to be voided and reissued.
  • Requires careful monitoring.

Expert Tip: The goal of reconciliation is to explain every difference between your bank statement and your book balance. Don’t assume an amount is correct; always find its matching entry or record the difference with a clear explanation.

3. The Step-by-Step Reconciliation Process

Here is the high-level workflow for a clean bank reconciliation.

Here is a sample code block showing a typical bank transaction format you might encounter in an API or data export.

{
  "transaction_id": "TXN12345",
  "date": "2025-09-30",
  "description": "Monthly Service Fee",
  "amount": -15.00,
  "type": "Withdrawal",
  "category": "Bank Charges"
}

4. Performing the Reconciliation

  1. 1

    Obtain Bank Statement

    Download or access the bank statement for the exact period you intend to reconcile.

  2. 2

    Access Accounting Software

    Open your accounting software and navigate to the bank reconciliation module for the specific bank account.

  3. 3

    Enter Ending Balance & Date

    Input the ending balance from your bank statement and the statement’s end date into your accounting software.

  4. 4

    Match Transactions

    Compare each transaction on your bank statement to the entries in your accounting software and mark them as cleared/matched.

  5. 5

    Record Unmatched Items

    For transactions on the bank statement not yet in your books (e.g., bank fees, interest income), record them in your accounting software.

  6. 6

    Identify Book Transactions Not on Statement

    These are your ‘deposits in transit’ and ‘outstanding checks’. Ensure these are legitimate and will clear in the next period.

Common Error: Incorrect Signage

Make sure to double-check debit and credit entries. A common mistake is reversing the sign on bank fees (expense) or interest income, which will lead to an incorrect reconciliation difference.

5. Finalizing and Reviewing

Reconciliation Checklist

  • Ending balance in accounting software matches adjusted bank balance
  • All outstanding items (deposits in transit, outstanding checks) are identified and correct
  • Bank fees, interest, and other bank charges are accurately recorded
  • All discrepancies are investigated, understood, and resolved
  • The reconciliation report is saved, printed, or exported for audit trails

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