Accounting

Bank Reconciliation, Step by Step

Your cash book says ₹2,84,650. The bank statement says ₹2,34,940. Neither is wrong. They are two records of the same account kept by two parties who learn about transactions at different moments, and reconciliation is the process of explaining every rupee of the gap.

If you cannot explain a difference, you have not finished. An unexplained residue is where fraud and posting errors hide.

Why the two balances differ at all

Almost every difference falls into one of four buckets.

Timing on payments you made. You wrote a cheque and reduced your cash book. The payee has not banked it yet, so the bank has not reduced its balance. These are unpresented or outstanding cheques.

Timing on receipts you banked. You recorded a receipt and increased your cash book. The bank has not cleared it yet. These are deposits in transit.

Things the bank knows first. Charges, interest credited, NACH or standing instruction debits, a direct credit from a customer. The bank acts, you find out when you read the statement.

Errors. Either side can make them. A transposed figure in your books, a cheque debited twice, a debit that belongs to another account.

The procedure

1. Fix the date. Reconcile to a specific cut-off, usually month end, and use the statement that ends on that date.
2. Tick off everything that appears in both records at the same amount.
3. List what is in the cash book but not the statement. Those are your timing differences on your side.
4. List what is in the statement but not the cash book. Those are either bank-initiated items or things you have missed.
5. Investigate anything that is in both but at different amounts. Those are errors, not timing.
6. Build the statement, starting from one balance and arriving at the other.
7. Pass journal entries for the items that belong in your books. This step is the one most often skipped.

A worked reconciliation

A trading firm closing 31 March. Cash book balance ₹2,84,650. Bank statement balance ₹2,34,940. Comparing the two throws up six differences.

From the bank statement to the cash book

It agrees. Every rupee of the ₹49,710 headline gap is explained by six identified items that happen to partly offset each other, which is why the size of the net difference is never evidence of the size of the problem.

Reading the signs correctly

The direction of each adjustment trips people up. The reliable way to think about it: ask what the other record has not yet done.

An unpresented cheque means the bank has not yet reduced its balance, so the bank’s figure is too high relative to yours. Starting from the bank, subtract it. A deposit in transit means the bank has not yet increased its balance, so starting from the bank, add it. Items the bank recorded first work the other way round: a charge or wrong debit the cash book has not recorded is added back, and interest the cash book has not recorded is subtracted.

If you build the statement in the other direction, from cash book to bank statement, every sign reverses. Both presentations are correct. Pick one and be consistent, because mixing them mid-statement is how errors get introduced.

The step people skip

Items 4, 5 and 6 are not merely reconciling items. Three of them require action.

Bank charges of ₹1,180 are a real expense you have incurred and not recorded. Debit bank charges, credit bank.

Interest of ₹3,420 is real income you have earned and not recorded. Debit bank, credit interest income.

The ₹25,000 wrong debit is not yours to record at all. It stays a reconciling item and you raise it with the bank immediately. Do not journal it. Do not net it off. If it is still sitting there next month, escalate it in writing.

After passing the two genuine entries, the cash book balance becomes ₹2,84,650 − ₹1,180 + ₹3,420 = ₹2,86,890, and that is the figure that belongs in your financial statements. The unreconciled bank error remains disclosed as a reconciling item until the bank corrects it.

A reconciliation that is never posted is just a spreadsheet. The point of the exercise is to get the books right.

What to do when it will not agree

Check the difference against 9. If the unexplained gap divides evenly by 9, you almost certainly have a transposition, ₹4,570 entered as ₹4,750.

Check whether the difference is exactly twice an item on the list. That is the signature of an entry posted on the wrong side, a debit where a credit belonged.

Check the opening balance. If last month’s reconciliation was wrong, this month cannot agree. Do not carry the error forward and adjust around it.

Check for stale cheques. A cheque outstanding for more than three months has generally expired. It should be reversed in the books and, if the liability still exists, re-recognised as a payable. Old unpresented cheques accumulating year after year are a common audit finding.

Do not create a suspense balance and move on. A suspense account is a place to park something for hours, not months.

Doing this monthly

Reconcile every bank account every month, and do it before you close, not after. Two habits make it painless: reconcile in the same order every time, and never adjust the bank’s figure to match yours. The bank statement is external evidence. Your cash book is the thing that gets corrected.

For a business with several accounts, reconciliation is one line on a longer monthly sequence. The month-end close checklist sets out where it sits relative to accruals, depreciation and review.

Where this fits

• The same ground from first principles: bank reconciliation in the accounting course
• Why the two sides move at all: debits and credits
• Once the bank balance is right, the next question is usually cash: profitable but no cash in the bank
• Forward view: the 13 week cash flow forecast and the cash flow calculator
• Terms used here: accounting glossary