Bank reconciliation is the process of comparing an organisation's own record of a bank account, its cash book or cash ledger account, with the bank's record of the same account, and explaining every difference between the two balances. It is one of the oldest and most basic controls in bookkeeping, used by sole traders, companies, charities, governments and payment firms. Its purpose is to catch errors, missing entries, bank charges the business has not yet recorded and unauthorised transactions.
The bank's side comes from the bank account statement, which is why the task is also called bank statement reconciliation. It is the most common form of account reconciliation and a narrower task than cash reconciliation, which also covers physical notes and coins. Most businesses perform it at least monthly as part of the month-end close; treasury teams in larger firms reconcile major accounts daily.
Bank reconciliation in plain terms
Imagine writing down every payment and deposit in a notebook, and then comparing the notebook with the statement the bank sends. The two rarely agree on the day you check. A cheque you wrote last week may not have been cashed yet, a deposit you made on Friday may not show until Monday, and the bank may have charged a fee you never wrote down.
A bank reconciliation lists those reasons one by one. Once the timing gaps are set aside and the forgotten fees are added to the notebook, both sides should land on the same number. If they still do not, something is wrong: a typing mistake, a payment recorded twice, or money taken that should not have been.
Reconciling items
Differences fall into two groups. Items on the bank side are timing differences that the bank has not yet processed; items on the book side are things the bank knows about but the business has not recorded.
- Deposits in transit. Money recorded in the books but not yet credited by the bank. These are added to the bank balance.
- Outstanding cheques. A cheque issued and recorded but not yet presented for payment. These are subtracted from the bank balance.
- Bank charges and interest. Fees, interest earned or paid, and overdraft charges shown on the statement but not yet booked.
- Returned items. A customer cheque or direct debit that bounced, shown on the statement as a returned payment.
- Errors. Transposed digits, duplicate postings or transactions posted to the wrong bank account, on either side.
Worked example
The adjusted balances on both sides must be equal:
- is the closing balance on the bank statement.
- is deposits in transit and is outstanding cheques.
- is the cash-book balance, is unrecorded bank fees and is unrecorded interest received.
| Bank side | Amount | Book side | Amount |
|---|---|---|---|
| Statement balance | 12,000 | Cash-book balance | 10,950 |
| Add deposit in transit | 1,500 | Less bank fee | (50) |
| Less outstanding cheque | (2,600) | Add interest received | 0 |
| Adjusted bank balance | 10,900 | Adjusted book balance | 10,900 |
The business then posts a journal entry for the 50 fee (debit bank charges, credit cash). The deposit and cheque need no entry; they should clear on next month's statement, and any that do not are investigated.
Statement data and automation
Manual reconciliation from paper or PDF statements is still common among small businesses. Larger organisations receive machine-readable statements and use matching software inside an ERP or a treasury management system. Common formats include BAI2 in the United States, SWIFT MT940 end-of-day statements, and the ISO 20022 camt.053 statement and camt.052 intraday report. SWIFT ended the coexistence period for cross-border payment instructions in November 2025, but statement messages such as MT940 were not withdrawn at that point. Banks also offer statements and transaction feeds through a bank API, and same-day data supports balance reporting and daily cash positioning.
Software matches statement lines to ledger entries by amount, date and reference, which is transaction reconciliation at line level. Structured references, such as the remittance fields in ISO 20022 messages or a virtual account number per customer, raise match rates.
Role in fraud prevention and audit
A timely bank reconciliation is a primary control against cheque fraud, unauthorised debits and payment diversion fraud. Banks' account agreements and laws such as the US Uniform Commercial Code give customers limited time to report unauthorised items, so late reconciliation can leave a business bearing a loss it could otherwise have recovered. Duties should be separated: the person who reconciles should not be the person who signs cheques or approves payments. Auditors routinely reperform year-end bank reconciliations and confirm balances directly with the bank.