What is bank reconciliation?

Bank reconciliation (definition)

There can be times when your financial records might not be the same as your bank’s. Bank reconciliation involves comparing these records and identifying any differences between the two. This is important for keeping track of your business’s money.

There are a few reasons the balance on your records may not be the same as the bank’s:

  • When someone hasn’t yet cashed a cheque you’ve sent: The money owed from that cheque is still in your bank account – but it’s no longer yours to spend.
  • Changes to bank accounts at the end of a month: This can happen when you withdraw or deposit money just before the bank sends a statement. Those changes to the account might not show until the following month’s statement.
  • The bank deducts loan payments: The bank can deduct money for loans before you enter that information into your systems.
  • Deposits in transit: Deposits you’ve made and recorded in your books that haven’t yet processed through the bank.

Bank reconciliation helps you identify these cases so you know exactly how much money is available to your business. It’s also needed to identify any cases of human error, bank charges and possible fraud.

See related terms

Handy resources

Advisor directory

You can search for experts in our advisor directory

Find an advisor

How to do bank reconciliation

Learn the steps to completing bank reconciliation for your business

Read article

Bank reconciliation with Xero

Keep track of your cash flow with fast bank reconciliation

Find out more

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.