How to Do a Bank Reconciliation, Step by Step

A bank reconciliation is the process of proving that your cash balance in the books matches what the bank actually holds, once you account for the handful of items that have not cleared yet. Done properly it takes minutes. Done by eyeballing two PDFs, it takes an evening and still misses things.

What a reconciliation actually proves

Your bank statement and your general ledger cash account almost never show the identical figure on the same day, and that is normal. A check you wrote on the 28th might not clear until the 3rd of next month. A deposit you made at 5pm on the 30th might post to the bank the next business day. None of that means your books are wrong. A reconciliation separates real errors from timing, so you can say with confidence that the number on your balance sheet is the true cash position.

What you need before you start

You need the bank statement for the period (or a CSV export of the transactions), and the cash account from your books for the same period, in a comparable format: date, description, reference and a signed amount. Most banks and accounting systems export CSV directly. If you already have both files ready, the free bank reconciliation tool will do steps two through five below automatically; the rest of this article explains what it is doing under the hood, which matters even if a computer does it for you.

Step 1: Confirm the starting point

Check that last period's reconciliation closed clean, meaning last period's adjusted bank balance equalled last period's adjusted book balance. If it did not, do not start a new reconciliation on top of an unresolved one; fix the prior period first or the difference will just carry forward and compound.

Step 2: Match transaction by transaction

Go line by line through the bank statement and tick off each item against the cash account in your books. Checks and ACH debits match by amount and, ideally, by check number or reference. Deposits match by amount and date. Anything that appears on both sides gets marked matched and set aside; you only need to think hard about what is left.

Step 3: List what does not match

Two kinds of unmatched items show up, and they get treated completely differently.

1. Timing differences. These are real transactions that exist in both places but have not posted to the bank yet: outstanding checks (written in your books, not yet cashed) and deposits in transit (recorded in your books, not yet credited by the bank). These do not need a journal entry. They explain the gap between the two raw balances.
2. Bank-only items. These exist on the statement but nowhere in your books yet: bank service charges, interest earned, a returned customer check (NSF), or a wire fee. These are real activity your books have not recorded, and they do need a journal entry.

Step 4: Build the two adjusted balances

The classic reconciliation format works from both ends toward the middle. Start from the bank statement balance and adjust for timing differences (add deposits in transit, subtract outstanding checks). Separately, start from the book balance and adjust for bank-only items (subtract fees and NSF checks, add interest and other credit memos). If both sides are done correctly, the two adjusted numbers land on the same figure.

Worked example

A small business closes June with a bank statement balance of $14,200.00 and a book cash balance of $14,340.00. Two checks have not cleared (#2041 for $850.00 and #2044 for $545.00, totaling $1,395.00), and a $1,200.00 deposit made on June 29th has not posted yet. The bank also charged a $45.00 monthly service fee, returned a customer's $300.00 check as NSF, and paid $10.00 in interest, none of which are in the books yet.

Both adjusted balances land on $14,005.00, so the reconciliation is clean. Nothing here was an error; every dollar was accounted for as either a timing difference or a missing entry.

Step 5: Record the adjusting entries

Everything on the book-side adjustment needs a journal entry, because those are real transactions your ledger is missing: debit bank fees expense $45.00, debit accounts receivable (or a bad-debt/clearing account) $300.00 for the NSF check, and debit cash $10.00 against interest income, all credited to (or from) cash as appropriate. Timing differences get no entry; they will clear naturally next period when the check cashes or the deposit posts.

Step 6: File it and move on

Keep the reconciliation itself (the two adjusted-balance schedules and the source files) as your audit trail. If a bookkeeper, accountant or auditor ever asks "how do you know your cash balance is right," this document is the answer. Doing this monthly, on a fixed date in your month-end close checklist, is what keeps a small discrepancy from turning into a six-month hunt for a rounding error.

Where the free tool helps

The matching logic above, reference-and-amount first, then amount within a date window, then amount alone, is exactly what the bank reconciliation tool runs against your two CSVs in the browser, with every match labeled by method and confidence so you can see why the software thinks two lines belong together instead of trusting a black box. For a second full worked example with the underlying CSVs shown line by line, see the reconcile a bank statement guide.