A bank reconciliation is the check that the balance in your accounting records agrees with the balance on your bank statement at the same date, with every difference explained. The differences are usually timing items, such as payments you have recorded that have not yet cleared, or bank charges you have not yet entered. Once those are accounted for, any remaining difference is an error or something worse. Businesses should reconcile every bank account at least monthly, and many reconcile daily in cloud software.
Why bank reconciliation matters
The bank statement is the one record a business does not write itself, which makes it the best independent check on everything else. A reconciliation catches:
- Missing transactions. Direct debits, bank charges, interest and card fees that never made it into the books;
- Posting errors. Transposed figures, duplicated payments and receipts posted to the wrong account;
- Fraud. Payments nobody authorised and receipts that were recorded but never banked;
- Cash flow surprises. Cheques and transfers that have not cleared, so the balance that looks available is not.
For companies there is a legal angle too. Section 386 of the Companies Act 2006 requires every company to keep adequate accounting records, including day-to-day entries of all money received and spent. HMRC can charge a company up to £3,000 for failing to keep and preserve adequate records. An unreconciled bank account is hard evidence that the records are not adequate.
Why the two balances differ
The differences between the cash book and the bank statement fall into two groups.
Timing differences. These are items correctly recorded in the books that the bank has not yet processed. They need no correction, only explanation:
- Outstanding lodgements. Receipts entered in the books but not yet credited by the bank;
- Unpresented payments. Cheques written or payments scheduled that have not yet left the account.
Items missing from the books. These are things the bank has processed that the business has not recorded. They need correcting entries in the cash book: bank charges, interest received, direct debits and standing orders, dishonoured cheques, and receipts that arrived without notice.
How to do a bank reconciliation, step by step
- Pick the date. Use the closing balance on the bank statement at the period end, usually the last day of the month;
- Match transactions. Tick off every item that appears in both the cash book and the statement;
- Update the books. Enter bank-only items that belong in the records, such as charges, interest and direct debits, and correct any errors you find;
- List the timing items. Note each outstanding lodgement and unpresented payment;
- Reconcile. Statement balance, plus outstanding lodgements, less unpresented payments, should equal the updated cash book balance;
- Investigate and sign off. Any unexplained difference is chased down, not written off. The reconciliation should be reviewed and approved by someone other than the preparer.
A worked example
An illustration of a month-end reconciliation, with figures invented for the purpose:
| Item | £ |
|---|---|
| Balance per bank statement | 18,450.00 |
| Add: outstanding lodgement | 2,300.00 |
| Less: unpresented payments (£1,875.50 and £640.00) | (2,515.50) |
| Adjusted bank balance | 18,234.50 |
| Balance per cash book before adjustments | 18,301.70 |
| Less: bank charges not recorded | (42.20) |
| Less: direct debit not recorded | (85.00) |
| Add: interest received not recorded | 60.00 |
| Adjusted cash book balance | 18,234.50 |
The two adjusted balances agree, so the account is reconciled. The bank charges, direct debit and interest are posted to the books, and the lodgement and two payments should appear on next month's statement. If they do not, they need investigating.
Bank reconciliation in accounting software
Cloud packages such as Xero, QuickBooks and Sage import transactions through bank feeds and suggest matches against invoices, bills and rules. This makes daily reconciliation realistic for most businesses, but it changes the risks rather than removing them:
- Rule-based matching can post blindly. A bank rule that codes every payment to a supplier as one expense will be wrong when that supplier sends a refund or a capital invoice;
- "Reconciled" is not the same as "checked". Clicking OK on a suggested match does not prove the match is right. Compare the software's balance with the actual statement balance at month end;
- Feeds can break. Missing days or duplicated imports are common after a bank changes its connection, so a periodic statement-to-ledger check is still needed;
- Clearing accounts hide problems. Suspense, card clearing and payment-provider accounts should reconcile to nil or a known balance, not grow quietly.
The same discipline applies to every account that holds money, including credit cards, PayPal or Stripe balances, savings accounts, loan accounts and the petty cash float.
Controls and good practice
- Segregate duties. The person who makes payments should not be the only person who reconciles the account;
- Keep the evidence. Save each signed reconciliation with the statement. HMRC expects a limited company to keep records for 6 years from the end of the financial year they relate to, and sole traders for 5 years after the 31 January filing deadline;
- Review old items. Uncleared items more than a few months old are usually errors, lost cheques or duplicates;
- Reconcile before reporting. Management accounts, VAT returns and year-end accounts built on an unreconciled bank balance cannot be relied on.
Auditors look closely at bank reconciliations for the same reason: if cash is wrong, little else in the accounts can be trusted. Our guide to the purchase ledger covers the supplier-side controls that feed into it.
If your accounts are behind or the bank never quite agrees, our bookkeeping services team can bring the reconciliations up to date and keep them there. Our management accounts service then turns reconciled figures into monthly reporting you can use.