Person holding a jigsaw puzzle piece that fits into a puzzle with a dollar sign on it

The Art of Bank Reconciliation: A How-To Guide for Small Businesses

By Bryce Warnes on February 28, 2018

Bank reconciliations. Even the name sounds boring. They may not be fun, but when you do them on a regular basis you protect yourself from all kinds of pitfalls, like overdrawing money and becoming a victim of fraud.

Plus, there’s something Zen about bank reconciliations. They are about finding balance, after all.

So, assume the full lotus position or just find a comfy chair. We’re going to look at what bank statement reconciliation is, how it works, when you need to do it, and the best way to manage the task.

Bank reconciliations. Who needs ‘em?

Well, you, probably, if you’re a small business owner who A) has a bank account, and B) does bookkeeping. There’s a good chance the transactions in your bank account every month don’t match the transactions recorded in your business’ books. That’s where bank reconciliations come in.

When you “reconcile” your bank statement, you compare it with your bookkeeping records for the same period covered by the statement, and pinpoint every discrepancy. Then, you make a record of those discrepancies, so you or your accountant can be certain there’s no money that has gone “missing” from your business.

Accounting 101: Set Your Finances up the Right Way

Learn the fundamentals of small business accounting, and set your finances up for success with this free guide.

Who’s responsible for bank reconciliations?

Bank reconciliations help you make sure everything adds up, so they need to be done regularly.

If you do your bookkeeping yourself, you should be prepared to reconcile your bank statements on a fixed schedule (more on that below). If you work with a bookkeeper or online bookkeeping service, they’ll handle it for you.

You only need to reconcile bank statements if you use the accrual method of accounting. If, on the other hand, you use cash basis accounting, then you record every transaction at the same time the bank does; there should be no discrepancy between your books and your bank statement.

Not sure which accounting method you’re using? This article on cash vs. accrual accounting will make it clear.

Sorry, bank reconciliations aren’t optional

There are four compelling reasons why you need to perform regular reconciliations.

1. To see your business as it really is

When you look at your books, you want to know they reflect reality. If your bank account and your books don’t match up, you could end up spending money you don’t really have—or holding on to the money you could be investing in your business.

2. To track cash flow

Managing cash flow is a part of managing any business. Reconciling your bank statements lets you see the relationship between when money enters your business and when it enters your bank account, and plan how you collect and spend money accordingly.

3. To detect fraud

Reconciling your bank statements won’t stop fraud, but it will let you know when it’s happened.

For instance, you could pay a vendor by check, but they could tamper with it, making the amount withdrawn larger, and then cash it. The discrepancy would show up while you reconcile your bank statement.

Or you might share a joint account with your business partner. When they draw money from your account to pay for a business expense, they could take more than they record on the books. You’d notice this as soon as you reconcile your bank statement.

Hopefully you never lose any sleep worrying about fraud—but reconciling bank statements is one way you can make sure it isn’t happening.

4. To detect bank errors

It’s rare, but sometimes the bank will make a mistake. If there’s a discrepancy in your accounts that you can’t explain any other way, it may be time to speak to someone at the bank.

How to do a bank reconciliation

When you do a bank reconciliation, you first find the transactions that are responsible for your books and your bank account being out of sync. This lets you match balances. Then, you record what you did to match the balances.

We’ll go over each step in more detail, but first—are your books up to date? They need to be in order for the bank reconciliation to work. If you’ve fallen behind on your bookkeeping, use our catch up bookkeeping guide to get back on track (or hire us to do your catch up bookkeeping for you).

How balances are matched

The balance recorded in your books and the balance in your bank account will rarely ever be exactly the same.

One reason for this is that your bank may charge fees for services such as making transfers or maintaining an account. Another is that there may be a delay when transferring money from one account to another.

Two important terms to know:

  1. Outstanding check/withdrawal. This is a check or money transfer you’ve issued and recorded on your books which the bank has not yet processed.
  2. Outstanding deposit/receipt. (Also called deposits in transit.) This is money that has been received by your company and recorded on the books, but which has not been processed by the bank.

There’s nothing harmful about outstanding checks/withdrawals or outstanding deposits/receipts, so long as you keep track of them.

Recording bank reconciliations

Once you’ve figured out the reasons why your bank statement and your books don’t match up, you need to record them. There are two ways to do this.

Option 1: A note in the cash book. A “cash book” is the place where you first record debits and credits. If you’re not using accounting software, then this is probably an Excel sheet or a handwritten document. At the end of the period for which you’re reconciling your bank statements, make a note recording why there’s a discrepancy between your bank statement and your ledger.

Option 2: A bank reconciliation statement. This contains the same information as a note in your cash book, but it’s kept on file as a separate document.

The method you choose is up to personal preference and need. Consider when or why you might need to look back through your financial records for your bank reconciliation, and which method of recording will make the task easier for you based on how you keep your records.

How often to reconcile bank statements

For the most part, how often you reconcile bank statements will depend on your volume of transactions.

Some businesses, which have money entering and leaving their accounts multiple times every day, will reconcile on a daily basis.

For example, a restaurant or a busy retail store both process a lot of transactions, and they might reconcile on a daily basis. On the other hand, a small online store—one that has days when there are no new transactions at all—could reconcile on a weekly or monthly basis.

It’s important to keep up to date. The more frequently you reconcile your bank statements, the easier it is each time.

For instance, if you haven’t reconciled your bank statements in six months, you’ll need to go back and check six months’ worth of line items. Whether this is a smart decision depends on the volume of transactions and your level of patience.

It’s best to have a regular schedule. Decide how frequently you’ll reconcile, then stick to it. This will ensure your unreconciled bank statements don’t pile up into an intimidating, time-consuming task. And it will keep you in tune with your business’s cash flow.

Accounting 101: Set Your Finances up the Right Way

Learn the fundamentals of small business accounting, and set your finances up for success with this free guide.

Here’s what a bank reconciliation looks like

Suppose you run a business called Greg’s Popsicle Stand. When you receive your bank statement at the end of the month, this is how you reconcile it.

There are three steps: comparing your statements, adjusting your balances, and recording the reconciliation.

Comparing your statements

1. You compare your bank statement for the month of February with your cash book balance for the end of February. They look like this:

Bank balance: $1,081

Cash book balance: $1,200

2. You go through your bank statement, and find the following line items not included in your cash book:

Email money transfer fees, multiple dates:  $7

Checking account fee on Feb. 28: $12

3. You go through your cash book, and find the following line items not included in your bank statement:

Check deposited on Feb. 27: $8

Check deposited on Feb. 28: $4

Check issued on Feb. 28: $20

With that information, you can now adjust both the balance from your bank and the balance from your books so that each reflects how much money you actually have.

Adjusting your balances

Adjustments to bank balance

Original balance: $1,081

Step 1: Add outstanding deposits

Date Deposit Balance
Feb. 27 80 1,161
Feb. 28 40 1,201
February total 120 $1,201

Step 2. Deduct outstanding withdrawals

Date Withdrawal Balance
Feb. 28 20 1,181
Feb. total 20 $1,181

Adjusted balance: $1,181

Adjustments to books balance:

Original balance: $1,200

Step 1: Add outstanding deposits

Date Withdrawal Balance
N/A N/A 1,200
February total N/A $1,200

Step 2: Deduct outstanding withdrawals

Date Withdrawal Balance
Feb. 3 (email transfer fee) 1 1,199
Feb. 7 (email transfer fee) 1 1,198
Feb. 19 (email transfer fee) 1 1,197
Feb. 20 (email transfer fee) 1 1,196
Feb. 22 (email transfer fee) 1 1,195
Feb. 25 (email transfer fee) 1 1,194
Feb. 27 (email transfer fee) 1 1,193
Feb. 28 (account fee) 12 1,181
February total N/A $1,181

Adjusted balance: $1,181

Now that both your bank statement and your books share the same end-of-month balance for February, you have the real balance: $1,181.

Recording the reconciliation

When you record the reconciliation, you only record the change to the balance in your books. The change to the balance in your bank account will happen “naturally”—once the bank processes the outstanding transactions.

You have two options for recording your bank reconciliation. One is making a note in your cash book (faster to do, but less detailed), and the other is to prepare a bank reconciliation statement (takes longer, but more detailed).

A cash book note:

At the bottom of your spreadsheet for February, add this note, tracking changes to your balance.

Bank Reconciliation

Detail Amount
Cash book balance 1,200
Add: Outstanding deposits 0
Subtotal 1,200
Less: Outstanding withdrawals (fees) 19
Bank statement balance $1,181

Bank reconciliation statement:

Business name: Greg’s Popsicle Stand

Bank statement date: February 28, 2018

Bank account: Business Checking

Outstanding Withdrawals

Date Detail Amount
Feb. 3 Email transfer fee 1
Feb. 7 Email transfer fee 1
Feb. 19 Email transfer fee 1
Feb. 20 Email transfer fee 1
Feb. 22 Email transfer fee 1
Feb. 25 Email transfer fee 1
Feb. 27 Email transfer fee 1
Feb. 28 Checking account fee 12
- Total $19

Outstanding Deposits

Date Detail Amount
None N/A 0
- Total $0

Reconciliation

Detail Amount
Cash book balance 1,200
Add: Outstanding deposits 0
Subtotal 1,200
Less: Outstanding withdrawals (fees) 19
Bank statement balance $1,181

For some entrepreneurs, reconciling bank statements creates a sense of calm and balance. For others, it makes DIY bookkeeping that much more stressful. If you’re in the latter category, it may be time to think about hiring a bookkeeper who will do the reconciling for you. Learn more about how to hire the right bookkeeper for your business.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

Friends don’t let friends do their own bookkeeping. Share this article.

Want a free month of bookkeeping?

Sign up for a trial of Bench. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep. No pressure, no credit card required.

Decorative patterns