Bank reconciliation explained (with a simple example)
Bank reconciliation is the routine that proves your books and your bank statement tell the same story. It is the single most important control in small-business bookkeeping — and once you understand it, most "my numbers are off" problems become easy to find.
In one sentence: reconciliation means matching every transaction in your accounting software to every transaction on your bank or card statement, and explaining any difference until the two agree to the penny.
Why the two rarely match on their own
Your accounting records and your bank statement are built at different moments, so temporary gaps are normal:
- A cheque you wrote has not cleared the bank yet.
- A deposit is recorded in your books but still "in transit" at the bank.
- Bank fees, interest or a processor's charges appear on the statement but were never entered.
- A transaction was entered twice, or with the wrong amount.
- A payment landed in the bank but was never recorded at all.
Reconciliation is simply the process of accounting for each of these until the adjusted book balance equals the adjusted bank balance.
The reconciliation process, step by step
1. Gather the two records for the same period
Take the bank (or credit-card) statement for the month and open the matching account in your bookkeeping software.
2. Match transaction by transaction
Tick off every item that appears in both places. Most bookkeeping tools let you match a bank-feed line to a recorded transaction in one click.
3. Investigate what is left over
Anything unmatched is a clue. On the statement but not the books usually means a missing entry (a fee, a charge, a deposit). In the books but not the statement usually means something has not cleared yet, or was recorded in error.
4. Add what is missing, fix what is wrong
Enter legitimate items you had not recorded — bank fees, interest, auto-payments — and correct any duplicates or wrong amounts.
5. Confirm the balances agree
When the adjusted book balance equals the statement's ending balance (allowing for items still in transit), the account is reconciled. Lock the period so it does not drift.
A quick worked example
Your books show a closing balance of $10,000. The bank statement shows $9,850. Walking through the difference:
- A $200 cheque you wrote has not cleared — the bank is still $200 higher than it will be. Subtract $200 from the book side for outstanding items: reconciling toward $9,800.
- A $30 bank fee is on the statement but was never entered — record it, dropping your books to $9,970.
- A $20 interest credit is on the statement but not the books — record it, raising your books to $9,990.
After recording the fee and interest, and accounting for the uncleared cheque, both sides settle on the same reconciled figure. Nothing is unexplained — that is a clean reconciliation.
Payment processors add a layer. If you take card payments through Stripe, Square, Shopify or PayPal, the deposit that hits your bank is net of fees, refunds and holds — so it will not equal your sales. That is a specific reconciliation pattern; see Stripe payout reconciliation for how the pieces connect.
How often to reconcile
Monthly is the minimum, tied to each statement. Businesses with high transaction volume benefit from weekly reconciliation so exceptions are caught while they are still easy to trace. The longer an unexplained difference sits, the harder it is to find.
Tired of chasing differences by hand?
We set up automated categorization and reconciliation so your accounts stay matched daily and only true exceptions reach you for review. Works with QuickBooks, Xero, Sage and the tools you already run.
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This guide is general educational information, not accounting or tax advice.
Frequently asked questions
What is bank reconciliation in simple terms?
It is matching your accounting records against your bank statement for the same period and explaining every difference until both agree. It confirms your books reflect the money that actually moved.
What causes a bank reconciliation to not balance?
The usual causes are transactions that have not cleared yet, bank fees or interest that were never recorded, duplicate entries, wrong amounts, or a payment that hit the bank but was never entered in the books.
How often should I reconcile my accounts?
At least monthly, matched to each bank and card statement. Higher-volume businesses should reconcile weekly so differences are found while they are still easy to trace.