Bank Reconciliation: Step by Step

Why the Balances Don't Match

At the end of every month, the cash balance in your accounting records almost never matches the balance on your bank statement. This isn't an error — it's expected.

The difference exists because: - You wrote checks that haven't cleared the bank yet - You deposited money that the bank hasn't processed yet - The bank charged fees or earned interest that you haven't recorded - There are errors on either side

Bank reconciliation identifies each of these differences and brings both balances to the same correct number — the adjusted cash balance.

The Two-Column Approach

A bank reconciliation has two sides:

Bank side — Start with the bank statement balance and adjust for items the bank doesn't know about yet.

Book side — Start with the company's cash balance and adjust for items the company doesn't know about yet.

Both sides must arrive at the same adjusted balance. If they don't, keep looking for differences.

Wait — those don't match. That means we're missing something. Let's build a real example where they do.

Worked Example: Full Reconciliation

Given information for Mazen Trading, March 31: - Bank statement balance: SAR 86,500 - Company's Cash ledger balance: SAR 82,350

Items identified: 1. Deposit of SAR 12,000 made on March 31 — not yet on bank statement (deposit in transit) 2. Three outstanding checks: SAR 4,200 + SAR 2,800 + SAR 1,500 = SAR 8,500 3. Bank collected a note receivable of SAR 5,000 plus SAR 200 interest on the company's behalf 4. Bank service charge: SAR 150 5. Check #847 for office supplies was recorded in the books as SAR 1,340 but actually cleared for SAR 1,430 (recording error of SAR 90) 6. NSF (bounced) check from a customer: SAR 2,560

Bank side:

Book side:

Both sides equal SAR 90,000. The reconciliation is complete.

Which Items Need Journal Entries?

This is the part students often miss. After reconciling, you must record journal entries for book-side adjustments only. The bank side takes care of itself — those checks will clear, and that deposit will post.

From the example above:

Note collected by bank:

Service charge:

Recording error (underpayment of SAR 90):

NSF check:

The NSF entry reverses the original collection — the customer's check bounced, so they still owe the money. Accounts Receivable goes back up.

Bank Side vs Book Side — Quick Reference

Rule of thumb: If the company didn't know about it until seeing the bank statement, it goes on the book side and needs a journal entry. If the bank doesn't know about it yet, it goes on the bank side and no entry is needed.

Common Mistakes

1. Forgetting to record journal entries after reconciling The reconciliation itself doesn't update the books. You must post the book-side adjustments. Otherwise your Cash account is still wrong.

2. Putting items on the wrong side Deposits in transit go on the bank side (the bank doesn't know yet). Bank fees go on the book side (you didn't know yet). Mixing these up is the most common reconciliation error.

3. Treating outstanding checks as an error Outstanding checks are normal. You wrote the check, your books recorded it, but the payee hasn't cashed it yet. It will clear eventually.

4. Ignoring small differences A SAR 50 difference might seem trivial, but it means something is wrong. In practice, unreconciled differences compound over time and become much harder to trace. Reconcile to zero.

Bank reconciliation is one of the most frequently tested topics in accounting courses — and one of the most used skills in actual practice. Every accountant does this monthly. Practice building reconciliations on Accountery to build speed and accuracy.