How to do bank reconciliation

Published Tuesday 19 May 2026

Table of contents

• Why bank reconciliation matters
• What you need before you start
• Bank reconciliation steps
• Bank reconciliation formula
• Common bank reconciliation errors
• Bank reconciliation problems
• Bank reconciliation example
• Best practices for bank reconciliation
• How to use bank reconciliation software
• Stay on top of your finances with Xero
• FAQs on bank reconciliation

Key takeaways

• Bank reconciliation is the process of comparing your bank statements against your business records to confirm every transaction is accounted for accurately.
• Gather your bank statements, cash book or general ledger, and previous reconciliation report before starting so you can work through the process efficiently.
• Reconcile your accounts at least monthly, though weekly or daily reconciliation helps you detect errors or fraudulent activity faster.
• Use accounting software with bank feed connections to automate most of the reconciliation work, reducing manual effort and the risk of mistakes.

Why bank reconciliation matters

Bank reconciliation is the process of matching the transactions in your business records against your bank statements to make sure both sets of records agree. It's one of the most reliable ways to keep your finances accurate and up to date.

Regularly reconciling your bank accounts gives you a clear picture of your cash flow. You can spot potential issues like bank errors or fraudulent activity early. You can also 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 eight steps to reconcile your accounts.

1. Get bank records

Gather a list of transactions from your bank. You can get this from:

• a paper or PDF bank statement
• your online banking portal
• a direct feed to your accounting software

If you have both a current account and a credit card account, collect statements for each.

2. Get business records

Open your ledger of income and expenses. This could be:

• a physical logbook
• a spreadsheet
• accounting software

Some accounting software pulls in bills and receipts automatically using data capture tools.

3. Find your starting point

Find the last time the balance on your business books matched the balance in your bank account. Start reconciling from there.

4. Run through bank deposits

Check that each deposit on your bank statement appears as income in your records. If something is missing, add it and categorize it as:

• a customer payment
• interest earned
• a refund received
• another income type

5. Check the income on your books

Each entry should match a deposit on your bank statement. If something is missing, find out why. A customer payment might have bounced, for example.

6. Run through bank withdrawals

All bank withdrawals should be recorded in your books. This includes things like bank fees, which you might not have accounted for yet.

7. Check the expenses on your books

Verify that each expense in your records matches a withdrawal on your bank statement. For tax purposes, note that for purchases of $100 or more, receipts must show the vendor's business number if they are a Goods and Services Tax/Harmonized Sales Tax (GST/HST) registrant. If an entry doesn't match, it could be because:

• the payment hasn't cleared yet
• you paid with cash
• you used a different account

8. End balance

After checking all deposits and withdrawals, your bank balance should match your business records. If the numbers align, you're done reconciling.

This ending balance becomes the starting point for your next reconciliation.

Check out Xero's bank reconciliation features.

Bank reconciliation formula

Understanding the formula behind bank reconciliation helps you see how the numbers come together. While accounting software automates this, knowing the formula gives you a clearer picture of the process.

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.

Common bank reconciliation errors

Even with careful record-keeping, errors can come up during reconciliation. Knowing the most common ones helps you find and fix discrepancies faster.

Data entry errors

These happen when you record a transaction with the wrong amount, date, or category. Even a small typo can throw off your balance.

Omitted transactions

Sometimes a transaction simply doesn't get recorded. This could be a bank fee, a small purchase, or a deposit you forgot to log.

Transposition errors

A transposition error occurs when you accidentally swap two digits in a number, for example, entering $540 instead of $450. If your discrepancy is divisible by 9, a transposition error is likely the cause.

Timing differences

Timing differences happen when a transaction is recorded in your books but hasn't yet appeared on your bank statement, or the other way around. Common examples include:

• cheques you've issued that haven't been cashed yet
• deposits in transit that the bank hasn't processed
• pre-authorized payments that post on a different date than expected

Bank errors

Though uncommon, banks can make mistakes too. A deposit might be credited to the wrong account, or a withdrawal might be duplicated. Always verify bank entries against your own records.

Bank service charges

Monthly fees, overdraft charges, and other bank service charges often appear on your statement without a matching entry in your books. Add these to your records as they come up during reconciliation.

Bank reconciliation problems

When your bank balance and business records don't match, you need to diagnose where the mismatch is. Catching these discrepancies is exactly why you reconcile.

Your 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.

Your 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. Check invoices, receipts, emails, and calendar entries to find where the records don't match.

Bank reconciliation example

A worked example makes it easier to see how reconciliation comes together. Here's a simple scenario using specific dollar amounts.

Suppose your bank statement ending balance on 31 March is $12,350. Your cash book shows an ending balance of $11,900. The two don't match, so you need to reconcile.

Start with the bank statement balance and adjust it:

• Bank statement balance: $12,350
• Subtract an outstanding cheque for $600 (you issued it, but the recipient hasn't cashed it yet)
• Add a deposit in transit of $150 (you deposited it, but the bank hasn't processed it yet)

Adjusted bank balance: $12,350 – $600 + $150 = $11,900

Now adjust your cash book balance:

• Cash book balance: $11,900
• No adjustments needed in this example

Adjusted book balance: $11,900

Both adjusted balances equal $11,900, so your accounts are reconciled. If the numbers still didn't match, you'd review each transaction line by line to find the discrepancy.

Best practices for bank reconciliation

Following a few key habits can make reconciliation faster and more accurate over time.

Reconcile frequently

Reconcile at least monthly. Weekly or even daily reconciliation means fewer transactions to review each time and helps you catch errors while they're still easy to trace.

Use a dedicated business bank account

Keeping personal and business finances separate makes reconciliation much simpler. A dedicated business account means every transaction on your statement relates to your business.

Keep thorough documentation

Hold on to receipts, invoices, and records for every transaction. Good documentation speeds up the process and supports your records if the Canada Revenue Agency (CRA) ever audits your business.

Separate accounting duties

If you have employees, split responsibilities so that one person records transactions and another reconciles the accounts. This separation of duties reduces the risk of errors and fraud.

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. With Xero, bank feeds pull in your transactions automatically, so you don't need to enter them by hand.

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

• suggests a match: linking the transaction to an existing entry in your accounts
• prompts for details: asking what the transaction was for and recording it automatically

Xero also lets you set up bank rules to automatically categorize recurring transactions, such as rent or subscription payments. This means less manual work each time you reconcile.

Reconciling weekly or even daily keeps the task manageable. The more often you reconcile, the easier each transaction is to recall.

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.

What is bank reconciliation?

Bank reconciliation is the process of comparing your bank statement to your business's internal financial records to make sure both match. It helps you verify that every transaction has been recorded accurately.

Why is bank reconciliation important?

Bank reconciliation keeps your financial records accurate, helps you spot errors or fraud early, and ensures your books are ready for tax filing. It also gives you a reliable picture of your available cash.

How often should I do a bank reconciliation?

Reconcile at least monthly. More frequent reconciling, such as weekly or daily, means fewer transactions to review and helps you detect errors or fraud faster.

What are common problems people face during bank reconciliation?

The most common problems include data entry errors, omitted transactions, timing differences (such as outstanding cheques or deposits in transit), and unexpected bank fees. A transposition error, where two digits are accidentally swapped, is also a frequent cause of mismatches.

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, manual reconciliation takes longer and increases error risk, so even basic accounting software can save significant time.

Disclaimer

Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.

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