How to do bank reconciliation: steps, formula, tips

Published Thursday 26 February 2026

Table of contents

• Why bank reconciliation matters
• What you need before you start
• Bank reconciliation steps
• Bank reconciliation formula
• Bank reconciliation problems
• Fixing bank reconciliation problems
• How to use bank reconciliation software
• Stay on top of your finances with Xero
• FAQs on bank reconciliation

Key takeaways

• Gather your bank statements, business cash book or general ledger, and previous reconciliation report before starting to ensure you have all necessary documents for an efficient reconciliation process.
• Compare each bank deposit with your recorded income and each bank withdrawal with your recorded expenses, adding any missing transactions and investigating discrepancies to maintain accurate financial records.
• Reconcile your accounts at least monthly, though weekly or daily reconciliation makes the task more manageable and helps you detect errors or fraudulent activity faster.
• Use accounting software with bank feed connections to automate most of the reconciliation work, as this reduces manual effort and minimizes the risk of errors compared to manual spreadsheet methods.

Why bank reconciliation matters

Regularly reconciling your bank accounts is key to maintaining accurate financial records. It helps you get a clear picture of your cash flow. You can spot potential issues like bank errors or fraudulent activity. And you can make sure your books are ready for tax time.

By confirming your numbers are correct, you can make business decisions with confidence.

What you need before you start

Before you begin, gather a few key documents so you can work smoothly and efficiently. Having everything ready saves time.

• Your bank statements for the period you're reconciling
• Your business's cash book or general ledger showing all recorded income and expenses
• Your previous bank reconciliation report to confirm your starting balance

Bank reconciliation steps

Follow these steps to reconcile your accounts.

Check out Xero's bank reconciliation features.

Bank reconciliation formula

While accounting software automates this, understanding the formula can help you grasp how it works. There are two sides to the equation that must balance.

Adjusted Bank Balance = Bank Statement Balance + Deposits in Transit – Outstanding Cheques ± Bank Errors

Adjusted Book Balance = Cash Book Balance + Bank Credits – Bank Charges ± Book Errors

When both adjusted balances match, your accounts are reconciled.

Bank reconciliation problems

Problems reconciling your bank occur when transactions appear in one set of records but not the other. This is normal and can usually be explained straightforwardly.

Catching these mismatches is exactly why you reconcile.

Business books show something that's not on your bank statement?

This usually happens when:

• you received income but didn't deposit it
• you paid from a different account
• you paid with cash

Investigate the cause and update your records with the correct details.

Bank statement shows something that's not in your business books?

This usually happens when:

• you made a data entry error
• you forgot to record a transaction
• the bank added fees or interest you didn't expect

Add the missing transaction or correct the error in your records.

Fixing bank reconciliation problems

If you need to investigate, check invoices, receipts, emails, and calendar entries to find where the records don't match.

How to use bank reconciliation software

Bank reconciliation software makes reconciling faster and less tedious. Instead of switching between documents and comparing numbers manually, software automates most of the work.

Most banks can send transaction data directly to your accounting software through a secure online connection called a bank feed.

When you reconcile, the software pulls up each bank transaction and either:

• Suggests a match: links the transaction to an existing entry in your accounts
• Prompts for details: asks what the transaction was for and records it automatically

Reconciling weekly or even daily keeps the task manageable. The more often you reconcile, the easier each transaction is to recall. Set up a system that makes it quick to access your bank statements and business records.

Stay on top of your finances with Xero

Bank reconciliation can be quick and straightforward. With the right tools, you can keep your financial records accurate and up to date in just a few minutes a week. This gives you a real-time view of your business finances, helping you manage cash flow and plan for the future. Simplify your bookkeeping today. Get one month free.

FAQs on bank reconciliation

Here are answers to some common questions about bank reconciliation.

How often should I do a bank reconciliation?

Reconcile at least monthly. More frequent reconciling means fewer transactions to review and you can detect errors or fraud faster.

What if I'm behind on my bank reconciliations?

Start with your most recent month and work backward. If you're more than three months behind, consider hiring a bookkeeper to help clear the backlog.

Can I do bank reconciliation manually?

Yes, you can reconcile manually using spreadsheets or paper records. However, reconciling manually takes longer and increases error risk, so even basic accounting software saves significant time.