Bank reconciliation
Learn what bank reconciliation is, how it works, and how to reconcile your accounts in five simple steps.
Published Monday 17 August 2026
Table of contents
Key takeaways
- Bank reconciliation is the process of comparing your business's financial records against your bank statement to ensure they match and to identify any discrepancies.
- Regular reconciliation helps you spot errors, detect fraud, maintain accurate cash flow records, and keep your books in line with reality.
- Common reconciling items include unpresented cheques, lodgements not yet credited by the bank, and unrecorded bank charges or interest.
- Accounting software can automate much of the reconciliation process, saving time and reducing manual errors.
What is bank reconciliation?
Bank reconciliation is the process of comparing your internal financial records with your bank statement to make sure both sets of records agree.
When you run a business, your cash book (where you record all money coming in and going out) won't always match your bank statement on any given day. This is normal. Cheques you've written may not have been cashed yet, or lodgements you've made might not have cleared. There could also be bank charges or interest that you haven't recorded.
By reconciling regularly, you catch these timing differences and correct any errors. The goal is to reach an adjusted balance where your records and the bank's records agree.
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What is a bank reconciliation statement?
A bank reconciliation statement is a document that shows how your cash book balance and your bank statement balance have been adjusted to reach the same figure.
This statement provides a clear audit trail and helps you understand exactly why the two balances differed. It typically includes:
- Opening balance from your cash book
- Add: lodgements (deposits in transit) not yet credited by the bank
- Subtract: unpresented cheques that haven't cleared
- Adjustments for bank charges and interest not yet recorded in your books
- Adjusted balance where both sides agree
Why is bank reconciliation important?
Regular bank reconciliation protects your business and gives you confidence in your financial position. Here are the main benefits:
- Cash flow visibility: you get an accurate picture of how much money you actually have available, which helps with cash flow forecasting and planning.
- Error detection: reconciliation helps you find mistakes in your records, whether from data entry errors or incorrect amounts.
- Fraud prevention: unusual transactions or unauthorised payments become visible when you compare your records against the bank statement.
- Accurate financial reporting: your financial statements and tax returns will be based on correct figures.
- Tracking money owed to you: you can identify lodgements that haven't cleared and follow up on any that take too long.
How bank reconciliation works
Bank reconciliation involves matching every transaction in your records with the corresponding entry on your bank statement. When both entries match, you tick them off. When they don't match, you investigate.
The process becomes simpler when you use Xero accounting software, which can import bank transactions automatically and suggest matches. Instead of manually comparing printed statements line by line, you review suggested matches and approve them.
Whether you reconcile manually or with software, the goal remains the same: confirm that your books reflect what's actually in your bank account.
How to do a bank reconciliation in 5 steps
Follow these five steps to reconcile your bank account and keep your records accurate.
1. Compare your records with your bank statement
Start by gathering your cash book or accounting records and your latest bank statement. Go through each transaction in your records and find the matching entry on the bank statement.
Tick off or mark each item that appears in both places with the same date and amount.
2. Identify transactions that don't match
After matching what you can, look at the unmarked items. These might include cheques you've written but that haven't been cashed, lodgements that haven't cleared, or bank fees you haven't recorded.
List these items separately so you can work through them.
3. Investigate discrepancies
For each unmatched item, determine the reason. A timing difference (like an unpresented cheque) is normal and will resolve itself. An error in your records or the bank's records needs correction.
If you find a bank error, contact your bank promptly. If it's your error, note the correction needed.
4. Adjust your balances
Update your cash book to include any items that appear on the bank statement but aren't in your records, such as bank charges, interest, or direct debits. Calculate the adjusted book balance.
Then adjust the bank statement balance for items in your records that the bank hasn't processed yet, such as unpresented cheques and lodgements in transit.
5. Record the reconciliation
Once both adjusted balances agree, document the reconciliation. Keep a record of the date, the final balance, and any adjustments made, in line with good practice for recording accounting transactions.
This creates an audit trail and makes your next reconciliation easier.
Bank reconciliation example
Here's a worked example showing how bank reconciliation brings two different balances into agreement.
Your cash book shows a balance of €10,500. Your bank statement shows €10,800. These figures don't match, but that doesn't mean there's a problem.
After reviewing both records, you find three reconciling items:
- An unpresented cheque for €600 to a supplier, recorded in your books but not yet cashed at the bank
- A lodgement of €200 you made that hasn't been credited yet
- A €100 bank charge on the statement that you haven't recorded
To calculate the adjusted book balance, take your book balance and subtract the unrecorded bank charge: €10,500 − €100 = €10,400.
To calculate the adjusted bank balance, take the statement balance, subtract the unpresented cheque, and add the lodgement in transit: €10,800 − €600 + €200 = €10,400.
Both adjusted balances now agree at €10,400. The reconciliation is complete.
Key terms for bank reconciliation
Understanding these terms will help you complete your reconciliations with confidence.
- Book balance: the balance shown in your cash book or accounting records
- Bank balance: the balance shown on your bank statement
- Adjusted balance: the final balance after accounting for all reconciling items, where both records agree
- Unpresented cheques: cheques you've written and recorded but that haven't been cashed or cleared by the bank yet
- Lodgements (deposits in transit): money you've paid into your account that the bank hasn't credited yet
- Bank charges and interest: fees charged by the bank or interest earned that may appear on your statement before you record them
- Reconciling items: any transactions that cause a difference between your book balance and bank balance
Common bank reconciliation challenges
These are the most frequent issues businesses encounter when reconciling.
- Timing differences: cheques and lodgements take time to clear, creating temporary mismatches between your records and the bank
- Data entry errors: transposed numbers, decimal mistakes, or recording the wrong amount in your cash book
- Unrecorded bank charges and interest: fees or interest that appear on your statement but haven't been entered in your records
- Returned or bounced cheques: lodgements that initially appear as deposits but are later reversed when a cheque bounces
- High transaction volume: businesses with many daily transactions may find it harder to match every item
How often should you reconcile?
The right frequency depends on your transaction volume and how closely you need to monitor your cash position.
- Monthly: suitable for businesses with lower transaction volumes that keep accurate books through regular double-entry bookkeeping
- Weekly: a good choice for businesses with moderate activity that want to catch errors quickly
- Daily: recommended for high-volume businesses or those where cash flow is tight and needs close monitoring
Bank reconciliation tips and best practices
These practices help make reconciliation faster and more reliable.
- Reconcile on a consistent schedule so discrepancies don't accumulate
- Use bank reconciliation software to automate transaction matching and save time
- Keep supporting documents such as receipts, invoices, and cheque stubs organised for easy reference
- Segregate duties where possible, so the person who records receipts and payments differs from the person who reconciles
- Investigate discrepancies immediately rather than leaving them for later
- Document your reconciliation process so anyone can follow it
Simplify bank reconciliation with Xero
Xero connects directly to your bank, importing transactions automatically and suggesting matches with your records. Instead of comparing statements line by line, you can review and approve matches in a few clicks.
With automatic bank feeds and smart matching, you spend less time on manual data entry and more time running your business. Ready to make reconciliation easier? You can get one month free and see how Xero works for you.
FAQs on bank reconciliation
Here are answers to common questions about bank reconciliation.
Is bank reconciliation the same as bookkeeping?
No. Bookkeeping involves recording all your financial transactions, while bank reconciliation is a specific process that checks your bookkeeping records against your bank statement to make sure they match.
How long does bank reconciliation take?
It depends on your transaction volume and method. With accounting software that imports bank feeds, reconciliation can take just a few minutes. Manual reconciliation takes longer, especially for high-volume accounts.
Can you automate bank reconciliation?
Yes. Accounting software can connect to your bank, import transactions automatically, and suggest matches. You still review and approve the matches, but the manual comparison work is greatly reduced.
What happens if you don't reconcile your bank accounts?
Errors and fraud may go undetected, your financial reports may be inaccurate, and you won't have a clear picture of your actual cash position. This can lead to poor decisions and compliance issues.
What are the three main methods of bank reconciliation?
The three main methods are manual comparison against the bank statement, preparing a formal bank reconciliation statement, and automated matching using accounting software.
Related terms
Learn more about bank reconciliation
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Bank reconciliation with Xero
Keep track of your cash flow with fast bank reconciliation
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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.