A bank reconciliation compares the bank balance in an entity’s accounting records with the balance shown by the bank statement. It identifies transactions recorded by one side but not yet recorded by the other, as well as mistakes that require correction.
Modern cloud systems can import bank transactions, but reconciliation remains essential. Automatic feeds do not guarantee correct coding, completeness, duplicate prevention or genuine authorisation.
Why Bank Balances Differ
| Difference | Where it appears first | Treatment |
|---|---|---|
| Bank charges or interest | Bank statement | Record in the cash book or bank ledger. |
| Direct debit or standing order | Bank statement | Record the payment and related expense or liability. |
| Customer transfer not yet recorded | Bank statement | Record receipt and clear the customer balance. |
| Outstanding deposit | Accounting records | Timing item; no ledger correction if correctly recorded. |
| Unpresented payment or cheque | Accounting records | Timing item until the bank processes it. |
| Bank error | Bank statement | Notify the bank; do not alter correct books merely to agree. |
| Bookkeeping error | Accounting records | Correct the ledger entry. |
Step 1: Obtain Reliable Records
Use the bank statement for the same ending date as the ledger balance. Confirm the correct bank account, currency and period. Obtain supporting evidence for unusual items and investigate missing statement pages or feed gaps.
Step 2: Match Transactions
Match deposits, card settlements, transfers, payments, fees, interest and loan transactions. Matching should consider amount, date, reference and counterparty. Similar amounts should not be matched automatically without evidence.
Step 3: Update the Accounting Records
Enter bank-originated items not already recorded, such as charges, direct debits, interest and customer transfers. Correct duplicate, reversed or wrongly coded entries. After these entries, calculate the adjusted ledger balance.
Step 4: Identify Timing Differences
Outstanding deposits and unpresented payments are already recorded in the ledger but have not reached the bank statement. They appear in the reconciliation rather than as new journal entries.
Step 5: Prepare the Reconciliation
The reconciliation can begin with the adjusted ledger balance and add or deduct timing items to reach the bank statement balance, or start with the bank statement and reconcile to the ledger. The direction of signs must be used consistently.
Worked Example
The ledger shows $18,450 before reconciliation. The bank statement shows $20,080. Review finds:
| Item | Amount | Action |
|---|---|---|
| Bank charges not recorded | $120 | Reduce ledger balance. |
| Customer transfer not recorded | $1,500 | Increase ledger balance. |
| Outstanding deposit | $2,000 | Timing difference. |
| Unpresented payments | $250 | Timing difference. |
Adjusted ledger balance = $18,450 − $120 + $1,500 = $19,830.
Adjusted ledger balance + outstanding deposit − unpresented payments = $19,830 + $2,000 − $250 = $21,580. This does not equal the bank statement of $20,080, so an additional $1,500 difference remains. The accountant should not force the reconciliation; the records must be rechecked. This illustrates that a reconciliation is an investigation, not a balancing plug.
Corrected Worked Example
If the bank statement balance were $21,580, the reconciliation would agree. Alternatively, if the actual statement is $20,080, one of the listed items or amounts is incorrect or duplicated.
Journal Entries
| Transaction | Debit | Credit |
|---|---|---|
| Bank charges | Bank charges expense $120 | Bank $120 |
| Customer receipt | Bank $1,500 | Trade receivables $1,500 |
| Interest received | Bank | Interest income |
| Direct debit for insurance | Insurance expense or prepayment | Bank |
Bank Reconciliation in Computerised Systems
Bank feeds reduce manual entry but do not remove the need for reconciliation. Controls should prevent duplicate imports, restrict rule changes, require review of unmatched items and preserve the audit trail. Reconciliation should be completed by someone independent of cash handling where practicable.
Fraud and Error Warning Signs
- Old outstanding deposits or payments that never clear.
- Frequent manual journal entries to the bank account.
- Round-sum transfers without explanations.
- Payments to unfamiliar recipients.
- Duplicate payments or reversed receipts.
- Reconciliations completed late or altered after approval.
- Unexplained differences carried forward.
Good Reconciliation Controls
- Reconcile every bank account regularly.
- Use a consistent cut-off date.
- Attach statements and evidence.
- Review long-outstanding items.
- Require independent approval.
- Lock completed periods or record later changes.
- Reconcile bank, loan, card and payment-processor accounts separately.
Common Mistakes
- Recording timing differences twice.
- Changing correct books to match a bank error.
- Ignoring stale payments or deposits.
- Using the wrong bank statement date.
- Forcing a difference to suspense without investigation.
- Assuming a bank feed proves completeness and accuracy.
Outstanding Items and Cut-Off
Outstanding items should be reviewed rather than carried indefinitely. An old unpresented payment may represent a lost cheque, a cancelled supplier claim or an entry that was never valid. An old outstanding deposit may indicate a recording error, a returned payment or an amount posted to the wrong bank account. The accountant should investigate, obtain approval and reverse stale entries when appropriate.
Cut-off is equally important. Receipts and payments recorded near period-end should be matched to the correct bank statement and accounting period. Backdated entries, deposits recorded before they are controlled by the entity and payments omitted until the next period can misstate cash and working capital.
Frequently Asked Questions
What is the main purpose of a bank reconciliation?
To explain and resolve differences between the accounting ledger and the external bank statement.
Are outstanding deposits journalised again?
No. They are timing differences if already recorded correctly in the ledger.
What should happen to bank charges?
They are recorded in the accounting system because the bank statement provides evidence of the transaction.
Does online banking remove the need for reconciliation?
No. Imported data can be incomplete, duplicated, miscoded or unauthorised.
How often should bank accounts be reconciled?
The frequency depends on transaction volume and risk; high-volume accounts may require daily review, while smaller accounts are commonly reconciled monthly.
Related Guides
- Trial Balance Explained
- Source Documents and Books of Prime Entry
- Sales Ledger Process
- Financial Accounting Guide
Conclusion
The most useful analysis combines correct calculations with context. A ratio, valuation, reconciliation or accounting treatment should be applied consistently, supported by evidence and interpreted with the entity’s facts, reporting framework and materiality in mind.
Authoritative references: ACCA — Process for Preparing Financial Statements, ACCA — Computerised Accounting Systems, ACCA — Suspense Accounts and Error Correction.