What Is Bank Reconciliation? How the Process Works

Managing your business finances is a constant conundrum, with countless tasks vying for your attention. Minor time commitments like managing inventory, expenses, and sales add up, and it’s easy for tasks like reconciling your bank statements to get pushed aside. Yet skipping this step leaves you blind to errors and fraud. Mastering bank reconciliation safeguards your cash and gives you a real-time snapshot of your cash flow.

What is bank reconciliation?

Bank reconciliation compares your bookkeeping records (like the general ledger) with the bank statement to confirm that the balance in your company’s books matches the balance in your company’s bank account.

Even with careful recordkeeping, the two balances rarely match exactly because of timing differences, errors, or unrecorded transactions. Bank reconciliation pinpoints those differences and updates your books for accurate financial reporting.

3 types of bank reconciliation

1. Periodic account reconciliation
2. Continuous account reconciliation
3. Intercompany account reconciliation

While the bank reconciliation process compares your business’s bookkeeping records with your bank statement, the approach to this accounting process can vary in terms of how often and the tools involved. Here are three types of bank reconciliation:

1. Periodic account reconciliation

Periodic account reconciliation compares your cash balance to the bank balance at regular, fixed intervals—most often monthly after you receive your bank statement. It’s the go-to method of bank reconciliation for small businesses.

2. Continuous account reconciliation

Continuous account reconciliation reviews transactions daily (or in near real-time) using direct bank feeds and automated matching rules. High-volume ecommerce brands often choose this always-on approach.

3. Intercompany account reconciliation

Intercompany reconciliation matches transactions between related entities, such as a parent company and its subsidiaries. It’s common in large corporations but less relevant for solo sellers.

How often should you do bank reconciliation? 

The right frequency of your bank reconciliation process depends on your transaction volume. Monthly bank reconciliation is non-negotiable for most merchants. It allows you to spot discrepancies early, providing an accurate financial snapshot at the end of each accounting period.

High volume stores may run weekly—or even daily—mini-reconciliation to spot missing payments or bank errors that could otherwise impact cash flow significantly.

Whatever cadence you pick, consistency is key for ensuring your financial data is always reliable.

What is the bank reconciliation process flow?

1. Gather documents
2. Compare deposits
3. Compare withdrawals and payments
4. Adjust bank statement balance
5. Adjust cash-book balance
6. Confirm final reconciliation

Gather documents

Collect all necessary financial records, including your latest bank statement, accounting records, and previous bank reconciliation reports. Review any outstanding checks or deposits in transit flagged in the previous month to see if they cleared. If they haven’t, it might indicate a problem, such as a lost check.

Compare deposits

Go through your bank statement’s deposits and match them to your company’s deposits recorded. Take note of any outstanding deposits in your books that aren’t on the bank statement (these are “deposits in transit”) or deposits in the bank statement that you haven’t recorded.

Compare withdrawals and payments

Next, match withdrawals, checks, and electronic payments (EFTs) listed on your bank statement with your bookkeeping records. Flag outstanding checks or payments you’ve recorded but that haven’t cleared your financial institution, or any withdrawals on the bank statement you didn’t record (service fees, automatic payments, etc).

Adjust bank statement balance

Add deposits in transit or deposits you’ve made after the ending date of the bank statement. Subtract outstanding checks to arrive at the adjusted bank balance.

Adjust cash-book balance

Add bank interest income earned and subtract bank service charges, insufficient funds (NSF) fees, or automatic debits not yet recorded. Fix any bookkeeping errors you uncover in your own records.

Confirm final reconciliation

After making all necessary adjustments to both the bank statement balance and your cash book balance, the account is reconciled. If the balances don’t match, re-check each step rather than forcing a match.

Finding and understanding discrepancies

Discrepancies are differences between your bookkeeping balance and your bank account balance. Identifying transactions that could have been recorded inaccurately is the goal of reconciliation. If your adjusted balances don’t match, it means you’ve missed a transaction or made an error.

Common discrepancies include:

• Deposits in transit: Cash or checks received and recorded by your business, but not yet processed by the bank (e.g., a deposit made late on the last day of the month).

• Outstanding checks: Checks written and recorded by your business, but not yet cashed by the recipient and cleared by the bank.

• Bank service charges: Fees charged by the bank (e.g., monthly bank service fees, overdraft fees) that you might not have recorded in your books yet. This could be due to checks deposited by your business that bounced, and the bank has debited your account for them in the form of insufficient funds (NSF) fees.

• Interest earned: Interest income credited to your account by the bank, which you may not have recorded.

• Bank errors: Mistakes made by the bank (e.g., incorrect debits or credits, processing errors). These are rare but can happen.

• Accounting errors: Mistakes in your own bookkeeping records (e.g., transposing numbers, not entering the correct balance, forgetting to record a transaction).

• Automatic payments, debits, or credits: Payments or credits automatically processed by the bank that you might not have been aware of or forgot to record.

Bank reconciliation best practices

• Separate business and personal bank accounts
• Reconcile regularly
• Use accounting software
• Keep clear records
• Investigate discrepancies promptly
• Don’t force a match
• Review for fraud
• Reconcile all bank accounts

For small business owners and ecommerce entrepreneurs, these best practices will streamline your bank reconciliation process:

Separate business and personal bank accounts

This is the cardinal rule of business, and it is important because mixing personal and business funds can lead to inaccurate financial records, making bank reconciliation difficult and jeopardizing tax compliance. It can also compromise your liability protection if your business is structured as a limited liability company (LLC). 

Reconcile regularly

Reconciling your bank accounts at least monthly is a must, especially if your business has high transaction volume. In that case, consider weekly or even daily quick checks to spot issues early. Making this a habit will help with estimating cash flow and ensuring that your financial reports are accurate.

Use accounting software

Accounting software like QuickBooks, Xero, or even industry-specific ecommerce accounting platforms often integrate directly with your bank accounts and offer time-saving automations, such as automatically importing transactions and flagging matches. This can significantly reduce manual work and the potential for errors. While powerful, remember that bank feeds are for importing, not reconciling. You still need to actively review and match transactions. For ecommerce businesses, you can integrate your sales channels with your accounting system to automatically push sales data to your books.

Keep clear records

Maintain an organized filing system for all bank statements, receipts, invoices, and payment confirmations. This makes it easier to track down and resolve discrepancies and provides an audit trail should specific questions arise about specific transactions. Without a systematic approach, identifying the source of an imbalance can be a frustrating and time-consuming scavenger hunt, potentially impacting the accuracy of your financial reporting.

Investigate discrepancies promptly

Don’t let unmatched items linger. The sooner you investigate, the easier it is to recall details or contact the relevant parties, including customers, vendors, or the bank. Delaying investigation can complicate the process as documents get misplaced and bank or vendor records become more difficult to access. Unresolved discrepancies can accumulate, making future reconciliations even more challenging and obscuring a clear view of your true cash position.

Don’t force a match

If your numbers don’t match, resist the urge to just make them fit. There’s an underlying reason, and finding it is key to accurate financials. Forcing a match without identifying the root cause will lead to continued inaccuracies in your financial statements and can mask serious errors or even fraudulent activity. Every unexplained difference represents an error in either your records or the bank’s, or a transaction you’re unaware of, and ignoring it means your records are unreliable.

Review for fraud

Reconciliation is a primary tool for detecting unauthorized transactions or potential fraud early. Regularly scrutinize unrecognized withdrawals. Pay close attention to unfamiliar payees, unusual transaction amounts, or any activity that seems out of the ordinary, as early detection can prevent major financial losses. Beyond just checking withdrawals, also look for missing deposits, altered check numbers, or unusual bank fees, which could all be indicators of internal or external fraud.

Reconcile all bank accounts

Don’t just reconcile your primary checking account. Apply the same accounting process to savings, credit cards, and even loan accounts for a full financial picture. Reconciliation across all financial accounts ensures that all cash flows are accounted for, balances are accurate, and your overall financial position is clearly understood. Neglecting to reconcile all accounts creates blind spots in your financial oversight, increasing the risk of unrecorded liabilities, unrecognized income, or missed errors.