Bank reconciliation
Learn what bank reconciliation is, why it matters and how to do it, with a simple example for your business.
Published Thursday 23 July 2026
Table of contents
Key takeaways
- Bank reconciliation is the process of matching your accounting records against your bank statement to confirm they agree.
- It helps you catch errors, spot bank fees and fraud, and keep an accurate view of your cash flow.
- Timing differences like outstanding cheques and deposits in transit are the most common reasons your records and the bank's don't match.
- Most small businesses reconcile monthly, though weekly or daily checks give you tighter control.
What is bank reconciliation?
Bank reconciliation is the process of comparing the transactions in your accounting records with those on your bank statement. You do it to confirm that both records agree and to explain any differences between them.
When the two match, you know your books reflect the real money moving in and out of your business. When they don't, reconciliation helps you find out why and put it right.
Why is bank reconciliation important?
Handy resources
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How to do bank reconciliation
Learn the steps to completing bank reconciliation for your business
Bank reconciliation with Xero
Keep track of your cash flow with fast bank reconciliation
Regular reconciliation keeps your financial records accurate, which you need for confident decisions, tax time, and applying for finance. It's one of the simplest ways to stay on top of your money.
Reconciling often gives you a clear, up-to-date picture of your cash flow, so you always know what you can actually spend. If you want to go deeper on this, our guide to managing cash flow walks through the essentials.
It also helps you catch problems early. You'll spot recording mistakes, bank fees you missed, duplicate charges, and any unauthorized transactions that could point to fraud.
Why your records and the bank's may not match
Most mismatches come down to timing or charges you haven't recorded yet, not errors. Here are the common causes to look for when your numbers don't line up.
- An uncashed cheque: you've recorded a cheque you wrote, but the recipient hasn't deposited it yet
- End-of-month changes: interest earned or adjustments post after you've closed your records
- Bank-deducted loan payments: an automatic repayment leaves your account before you note it
- Deposits in transit: you've recorded a deposit, but the bank hasn't cleared it yet
- Bank fees: monthly account or transaction charges the bank takes without notice
- NSF (non-sufficient funds) cheques: a cheque you deposited bounces because the payer's account lacked the funds
Key bank reconciliation terms
A few terms come up every time you reconcile. Knowing them makes the process quicker and clearer.
- Book balance: the cash balance shown in your own accounting records
- Bank balance: the balance the bank shows on your statement for the same date
- Outstanding cheque: a cheque you've issued and recorded that the bank hasn't paid out yet
- Deposit in transit: money you've recorded as received that the bank hasn't processed yet
- NSF cheque: a cheque that bounces because the payer's account didn't have enough funds
How to do a bank reconciliation
Reconciling comes down to comparing two records, explaining the gaps, and confirming they agree. Follow these steps each time you reconcile.
- Compare your book balance against your bank statement, and tick off every transaction that appears in both records.
- Adjust for the items that explain the difference, such as outstanding cheques, deposits in transit, bank fees, and NSF cheques.
- Record any missing transactions in your books and confirm your adjusted balance now matches the bank, then reconcile the account. Our guide on how to do bank reconciliation covers each step in more detail.
Bank reconciliation example
A quick example shows how the adjustments come together. Say your book balance is 5,000 dollars and your bank statement shows 5,200 dollars for the same date.
You review the gap and find two timing differences and one charge. Here's how each item affects the balances.
- An outstanding cheque for 500 dollars you wrote hasn't cleared the bank yet, so it lowers the bank balance
- A deposit in transit of 100 dollars you recorded hasn't been processed by the bank yet, so it raises the bank balance
- A bank fee of 200 dollars was deducted that you hadn't recorded, so it lowers your book balance
Adjust the bank balance down for the cheque and up for the deposit, which gives 4,800 dollars. Adjust your book balance down for the fee, which also gives 4,800 dollars. Both sides settle at 4,800 dollars, so the account reconciles.
How often should you reconcile?
How often you reconcile depends on how many transactions you handle. There's a simple rule of thumb to work from.
Most small businesses reconcile monthly, once the bank statement arrives. If you process a high volume of payments or want tighter control over your cash, weekly or even daily reconciliation keeps your records current and helps you manage money owed to you alongside your accounts receivable.
Simplify bank reconciliation with Xero
Bank reconciliation doesn't have to eat into your day. Xero pulls in your bank transactions automatically and suggests matches, so you can reconcile with a few clicks instead of comparing records by hand.
Xero can help give you a clearer, up-to-date view of your cash flow with less manual admin. Try Xero and get one month free.
FAQs on bank reconciliation
Here are answers to some frequently asked questions about bank reconciliation to help you get started.
What's the difference between a bank reconciliation and a bank reconciliation statement?
A bank reconciliation is the process of matching your records to the bank's. A bank reconciliation statement is the document that records the result, listing the adjustments that bring both balances into agreement.
How often should you reconcile your accounts?
Most small businesses reconcile monthly when the statement arrives. Reconcile weekly or daily if you handle a high volume of transactions or want closer control of your cash.
What causes differences between your books and the bank?
Timing differences like outstanding cheques and deposits in transit are the usual causes. Bank fees, NSF cheques, recording errors, and unauthorized transactions can also create a gap.
Can bank reconciliation be automated?
Yes. Software like Xero imports your bank transactions and suggests matches, so most of the work is done for you and you just confirm.
Related terms
Learn more about bank reconciliation
Handy resources
Advisor directory
You can search for experts in our advisor directory
How to do bank reconciliation
Learn the steps to completing bank reconciliation for your business
Bank reconciliation with Xero
Keep track of your cash flow with fast bank reconciliation
Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.