How to Do Bank Reconciliation: Step-by-Step Guide with Examples
Learn how to reconcile a bank statement step by step, with a worked example using real numbers. Covers NSF checks, bank fees, timing differences, and more.
What Is Bank Reconciliation and Why It Matters
A bank reconciliation statement is the formal process of comparing your internal accounting records — your books — against the transactions your bank reports on your statement. When the two sides do not match, the difference must be identified, explained, and corrected before you can close the period.
Three reasons every accountant and bookkeeper should take this seriously:
- Error detection. Transposition mistakes, duplicate entries, and missed transactions surface quickly when you compare line by line.
- Fraud prevention. Unauthorized withdrawals and altered checks are far easier to catch during a monthly review than during an annual audit.
- Accurate financials. Tax returns, loan applications, and investor reports all depend on a cash balance you can defend.
Skip reconciliation for a few months and the problems compound. Catch them monthly and they stay small.
How Often Should You Reconcile?
For most small businesses, monthly reconciliation is the minimum standard. High-volume operations — retail, e-commerce, or businesses with heavy payroll — benefit from weekly or even daily reviews.
A practical rule: reconcile every time a statement arrives. Most bank accounts issue statements monthly, which makes that a natural rhythm. The longer you wait, the harder it becomes to recall the context behind each transaction.
Step-by-Step: How to Do Bank Reconciliation
Step 1 — Gather Your Bank Statement and Your Books
Start with two documents side by side:
- Your bank statement — the official record from the financial institution covering the period you are closing
- Your internal records — QuickBooks, Xero, a spreadsheet, or whatever system you use
Getting the bank statement into a workable format is the first bottleneck. PDF statements are the standard delivery format from most banks, but accounting software and spreadsheets need structured rows and columns. Converting PDF bank statements to Excel or CSV before you start saves significant time (more on an automated solution below).
Step 2 — Match Transactions One by One
Work through each transaction on the bank statement and locate the corresponding entry in your books. Mark each pair as cleared. Most accounting software has a dedicated reconciliation screen; in a spreadsheet, a simple cleared column works fine.
Go through every category:
- Deposits and credits
- Withdrawals, payments, and debits
- Bank-initiated items such as service fees and interest credits
Step 3 — Identify Outstanding Checks and Deposits in Transit
Not every transaction will match immediately — and that is normal. Two reconciling items account for most of the gap:
Outstanding checks: Checks you have written and recorded in your books that the bank has not yet cleared. The bank balance looks higher than expected until these post.
Deposits in transit: Cash or checks you have deposited and recorded internally but that have not yet appeared on the bank statement. Your book balance will be ahead of the bank on these.
List every unmatched item and categorize it.
Step 4 — Identify Bank Errors vs. Book Errors
Some discrepancies are actual mistakes rather than timing differences.
Bank errors are rare — a payment processed at the wrong amount, or a deposit credited to the wrong account. Document these and contact your bank promptly; they should be corrected on your next statement.
Book errors happen more often — a duplicated entry, a transposition ($432 recorded as $342), or a payment that was never entered. Fix these in your accounting system with a correcting journal entry.
Step 5 — Make Adjusting Entries
For items you had not yet recorded in your books, make the necessary journal entries now:
- Bank service charges: Debit Bank Charges, credit Cash
- Interest earned: Debit Cash, credit Interest Income
- NSF checks returned: Debit Accounts Receivable, credit Cash
- Automatic payments: Debit the appropriate expense account, credit Cash
Step 6 — Verify the Ending Balances Match
After all adjustments, your adjusted bank balance and adjusted book balance must be equal. If they are not, you have missed a reconciling item.
The formula:
Adjusted Bank Balance =
Bank Statement Ending Balance
+ Deposits in Transit
− Outstanding Checks
± Bank Errors
Adjusted Book Balance =
Book Ending Balance
− Service Charges and NSF Checks
+ Interest Earned
± Book Errors
When both sides agree, the reconciliation is complete.
Worked Example: Bank Reconciliation with Sample Numbers
Let's walk through a real scenario for the month of May.
Starting balances:
- Bank statement ending balance: $4,250.00
- Book (QuickBooks) ending balance: $3,980.00
- Initial difference: $270.00
Adjustments to the bank balance:
| Item | Amount |
|---|---|
| Deposit in transit (May 31) | +$620.00 |
| Outstanding check #1042 | −$215.00 |
| Outstanding check #1051 | −$375.00 |
| Adjusted bank balance | $4,280.00 |
Adjustments to the book balance:
| Item | Amount |
|---|---|
| Bank service charge | −$15.00 |
| Interest earned | +$8.00 |
| NSF check returned (customer payment) | −$193.00 |
| Subtotal after adjustments | $3,780.00 |
The two sides still do not match — meaning there is a book error remaining. On closer review: a $500 deposit was recorded twice in QuickBooks. Removing the duplicate entry:
| Corrected book balance | $4,280.00 |
|---|
Both sides now equal $4,280.00. Reconciliation complete.
This example shows how a seemingly small discrepancy can hide multiple problems: a bounced customer check, a bank fee, and a duplicate posting. Each one would have distorted cash reporting left uncorrected.
Common Reconciling Items
NSF (non-sufficient funds) checks: A customer's check bounced. The bank reverses the deposit and charges a returned-item fee. Reverse the original deposit entry, record the fee, and re-invoice the customer.
Bank service fees: Monthly maintenance fees, wire transfer charges, and overdraft fees are debited by the bank automatically. They often go unrecorded in the books until the statement arrives.
Interest income: Savings and money market accounts earn interest the bank credits monthly. Record it as other income in your books.
Automatic payments and debits: Subscriptions, loan installments, and payroll tax debits sometimes post without a corresponding manual entry — especially if the person entering transactions is not the one reviewing the bank feed.
Direct deposits from customers: Large payments via ACH can sometimes hit the bank before an invoice is applied in the accounting system.
How LedgerLift Speeds Up the Whole Process
The most time-consuming step in bank reconciliation is often the first one: getting the bank statement into a usable format. Banks send PDFs. Accounting software needs structured data.
LedgerLift converts PDF bank statements to clean CSV or Excel files using AI — no templates, no manual formatting, and no bank-specific configuration required. It reads any statement intelligently, which means it works with community banks, credit unions, and international institutions that popular tools have never heard of.
Once your statement is a clean spreadsheet, the rest of the reconciliation workflow moves faster:
- QuickBooks Online push: Import the converted transactions directly into QBO without a CSV import wizard.
- Cloud folder automation: Connect your Google Drive, Dropbox, or OneDrive folder — drop in a PDF and get a formatted Excel file back automatically.
- Team and client management: Bookkeepers handling multiple clients can process statements in bulk and share outputs through a client portal.
- API access: Automate statement conversion inside your own workflows.
The free plan includes 120 pages with no credit card required. For practices processing dozens of statements per month, paid plans add batch processing and team seats.
FAQ
What is the difference between a bank statement and a bank reconciliation statement?
A bank statement is the document the bank issues showing all transactions it processed. A bank reconciliation statement is the internal document you prepare — comparing the bank statement to your own records and showing the adjustments needed to bring both into agreement.
How long does bank reconciliation take?
A small business with 50–100 monthly transactions should take a trained bookkeeper 20–40 minutes once the statement is in a usable format. Manually reformatting a PDF statement can add 30–60 minutes on top of that — the exact time LedgerLift eliminates.
What if I cannot get both sides to balance?
Re-add both sides from scratch. Then look for transposition errors: if the difference is divisible by 9 (for example, a $63 difference might mean $693 was recorded as $630), reversed digits are a likely culprit. Try isolating the discrepancy by reconciling the first half of the month, then the second. Narrowing the date range usually pinpoints where the mismatch begins.
Does bank reconciliation work the same way for credit card accounts?
The logic is identical — compare your internal records to the statement, identify unmatched items, and adjust. The main difference is that credit card statements show charges (a liability) rather than deposits (an asset), so debits and credits flip.
Is bank reconciliation required by law?
No jurisdiction directly mandates reconciliation as a named procedure, but tax authorities and auditors require accurate records — and reconciliation is the standard method for maintaining them. Lenders and investors frequently request reconciled statements as part of due diligence.
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