What is a bank reconciliation?
A bank reconciliation is a check that your records of cash match the bank’s records. The two balances are rarely the same on a given date, but every difference must have a reason.
Do it for each bank account, every month. It is one of the strongest controls a small finance team can run.
Why do the two balances differ?
Most differences are timing:
- Deposits in transit. You recorded a receipt, but the bank has not yet credited it.
- Unpresented payments. You issued a cheque or payment, but it has not cleared.
- Bank fees and interest. The bank recorded them; you have not.
- Direct credits. A donor paid in, and you have not yet matched it to a record.
Other differences are errors: a wrong amount, a duplicate entry, or a missing entry. Rarely, a difference is a sign of fraud.
How do you reconcile, step by step?
- Get the statement. Use the bank’s own statement for the month end date.
- Write the statement closing balance.
- Add deposits in transit. List receipts in your ledger that the bank has not yet shown.
- Subtract unpresented payments. List payments in your ledger that have not cleared.
- Find the adjusted bank balance. This is the number from steps 2 to 4.
- Take the ledger balance for the same account and date.
- Compare. If they match, you are done. If not, look for the difference.
- Post corrections. Record bank fees, interest and errors in the ledger.
- Review and sign. A second person checks and signs with a date.
How do you find a difference that will not go away?
Work through this list:
| Check | What to look for |
|---|---|
| Totals | Did you add or subtract correctly? |
| Matching | Tick each ledger line against a statement line |
| Transposed digits | An amount like 4,510 recorded as 4,150 |
| Duplicates | The same payment entered twice |
| Opening balance | Did last month’s reconciliation close at zero difference? |
| Currency | A payment recorded in the wrong currency |
A difference divisible by 9 often points to transposed digits. If you find nothing after these checks, ask a colleague to look with fresh eyes.
What should the record contain?
Keep for each account and month: the statement, the reconciliation sheet, the list of open items with dates, the corrections posted, and the preparer’s and reviewer’s names and dates. Auditors ask for these. See our month-end closing checklist for where reconciliation fits before you close the period.
What bad habits should you stop?
- Reconciling two or three months at once.
- Forcing a balance with a “plug” entry.
- Letting the same person pay, record and reconcile.
- Ignoring items that stay open for months.
A worked example
At month end, the bank statement shows a closing balance of 48,200. The ledger shows 47,350 for the same account.
The accountant lists two payments that were issued but have not cleared: 1,500 and 400. That is 1,900 outstanding. She also lists one donor receipt of 2,300 that was recorded on the last day but credited by the bank on the first day of the next month.
Adjusted bank balance = 48,200 + 2,300 - 1,900 = 48,600. The ledger shows 47,350, so the gap is 1,250.
She then checks the statement for items missing from the ledger. She finds a bank fee of 50 and a direct credit of 1,300 from a donor that nobody has recorded. The ledger needs 1,300 added and 50 deducted, a net of 1,250. After she posts the two entries, the ledger matches the adjusted bank balance. She marks the sheet, signs it and passes it to the head of finance for review.
How to handle open items
Keep a list of items that remain open at each month end, with the date they arose. Review the list every month.
- Deposits in transit should clear within days. If not, check with the sender.
- Unpresented payments should clear within weeks. Chase old ones with the payee.
- Unknown credits need a donor or a sender. Ask the bank for details, and hold the money in a clear suspense account until identified.
- Unknown debits should be raised with the bank straight away.
Control points
Rotate who prepares the reconciliation when you can. Give the reviewer the bank statement directly from the bank or online banking, not from the preparer. Check the opening balance against last month’s closing figure each time. If the preparer also has payment authority, move one of those duties to someone else.
Where EMPOBase fits
EMPOBase has Bank Reconciliation inside Cash Management, which also covers Balances, Accounts, Movements and Pay Requests. Your reconciliation work ties to the General Ledger. EMPOBase does not make bank transfers and has no settlement or proof-of-payment record. A payment approval or a posted journal does not prove the bank paid, so the bank statement stays your evidence. See the platform overview.