Bank reconciliation definition in plain English

A bank reconciliation is the monthly check that the cash balance in your books agrees with the balance on your bank statement, with every difference explained.

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Stacks of monthly bank statements held with binder clips, seen from above

What bank reconciliation means

Your bank keeps one record of your account and you keep another in your books. They should tell the same story, but they rarely match on any given day. A bank reconciliation lists every reason they differ, adjusts both balances for those reasons and confirms that the adjusted balances are equal.

Why the bank balance and the book balance differ

Timing. Checks you wrote have not cleared yet, and deposits you made late in the month reach the bank next month.
Items only the bank knows about. Service fees, wire fees, interest and returned customer checks.
Errors. An amount typed wrong, an entry posted twice or a transaction missed, on either side.

Why bank reconciliation matters

It catches errors while they are fresh and easy to fix.
It exposes fraud, such as altered checks or payments you never approved.
It keeps the cash figure in your financial statements and tax returns accurate.
It is a basic internal control that lenders and auditors expect to see documented.

Who reconciles and how often

Small business owners often reconcile their own accounts. Bookkeepers and accounting firms reconcile every client account as part of the monthly close. Every bank account, savings account and company credit card should be reconciled each month when the statement arrives, and accounts with heavy activity weekly.

Bank reconciliation steps in short

Take the statement closing balance and the book balance for the same date.
Match each statement line to its entry in the books.
Add deposits in transit and subtract outstanding checks on the bank side.
Add interest and subtract fees and returned checks on the book side.
Correct errors on the side where they happened.
Confirm the adjusted balances are equal and record the book side adjustments.

For each step in detail, see the process of bank reconciliation, and for numbers, the bank reconciliation example.

Key terms

Deposit in transit

Money recorded in the books but not yet credited by the bank at the statement date.

Outstanding check

A check written and recorded in the books that the bank has not paid yet.

NSF check

A customer check returned by the bank for not sufficient funds, which reverses a deposit you already recorded.

Adjusted balance

The bank or book balance after all reconciling items are added or subtracted.