A bank reconciliation reconciles two numbers that should agree but rarely do at first: the cash balance on the books and the cash balance on the bank statement. The gap between them is never the bank's "fault" — it is always made up of legitimate timing differences (checks that haven't cleared, deposits the bank hasn't processed yet) and small items each side knows about that the other does not (bank fees, NSF checks, interest). This walkthrough builds one reconciliation end to end, then records the journal entries it produces.

Why the Two Balances Disagree

The bank and the company keep their books separately and on different schedules. They will disagree for a handful of recurring reasons.

Items the company knows about but the bank does not yet:

  • Outstanding checks — written and recorded by the company, but not yet cashed by the payee.
  • Deposits in transit — recorded by the company but not yet processed by the bank (often a deposit dropped late on the last day of the month).

Items the bank knows about but the company does not yet:

  • Bank service fees — deducted by the bank but not in the books yet.
  • NSF checks — a customer check the company deposited that bounced; the bank reversed the deposit, but the books still reflect the customer paying.
  • Interest earned on the account, credited by the bank.
  • Direct collections or EFT payments the bank handled on the company's behalf.

Errors on either side can happen too. The reconciliation walks both balances toward the same true cash figure by adjusting for what each one is missing.

The Standard Format

A bank reconciliation has two columns. Both columns should reach the same adjusted balance — the true cash position. Bank-side adjustments (deposits in transit, outstanding checks) are not journalized; the bank will catch up on its own. Only book-side adjustments (interest, fees, NSF, errors) become journal entries — those are items the company has not yet recorded.

A flat lay of a printed bank statement, a checkbook ledger, and a green pen on a clean desk
A flat lay of a printed bank statement, a checkbook ledger, and a green pen on a clean desk

The Setup: A Worked Reconciliation

A small business called Cedar Hollow is reconciling its June bank statement. The numbers:

  • Balance per bank statement (June 30): $5,420
  • Balance per books (June 30): $4,690

Adjustments in play:

  • Deposit in transit (June 30 deposit dropped in the night drop): $1,200
  • Outstanding checks: Check #105 for $450; Check #109 for $280; Check #112 for $310 — total $1,040
  • Interest earned on the account, credited by the bank: $25
  • Bank service charge: $15
  • NSF check from a customer (Reilly): $200 — bank reversed the deposit
  • Error: Check #107 was written for $190 and correctly cleared the bank for $190, but was recorded in the books as $910. The book figure is too low by $720 (subtraction was too large by $720). Adding $720 back to books fixes it.

Now build the reconciliation.

Bank-side column

Balance per bank, June 30                $5,420
+ Deposit in transit                     +1,200
− Outstanding checks                     −1,040
Adjusted bank balance                    $5,580

Book-side column

Balance per books, June 30               $4,690
+ Interest earned                           +25
− Bank service charge                       −15
− NSF check from Reilly                    −200
+ Error: check #107 recorded high          +720
Adjusted book balance                    $5,220

The two columns do not match. $5,580 versus $5,220 — a $360 gap. That signals a missed item or a math error somewhere. Recheck the work. (When this happens on a real reconciliation, do not move on — the gap is telling you something.)

Suppose, on rechecking, you find a $360 outstanding check (Check #114) that was missed. Add it to the outstanding-checks list:

Bank-side column (corrected)

Balance per bank, June 30                $5,420
+ Deposit in transit                     +1,200
− Outstanding checks ($1,040 + $360)     −1,400
Adjusted bank balance                    $5,220

Now both columns reach $5,220. That is the true cash balance for Cedar Hollow at June 30.

The Journal Entries

Only the book-side adjustments become journal entries — those are the items the books did not yet reflect.

Entry 1: Interest earned

Cash                            25
    Interest Revenue                  25
(Record bank interest earned)

Entry 2: Bank service charge

Bank Service Charge Expense     15
    Cash                              15
(Record monthly bank service charge)

Entry 3: NSF check reversal

Accounts Receivable — Reilly   200
    Cash                             200
(Reverse the deposit of customer Reilly's NSF check)

The customer's bounced check did not actually pay anything — the deposit must be reversed, and the receivable comes back on the books. Cedar Hollow will now have to collect from Reilly directly.

Entry 4: Correct the check #107 error

The original entry recorded the check as $910 when the actual check was $190. The books credited Cash $720 too much. Add $720 back to Cash; the debit side fixes whatever account was originally debited too much.

Cash                           720
    Expense (or appropriate account)  720
(Correct $190 check recorded as $910)

After all four entries are posted, Cash in the books will equal $5,220 — the adjusted balance from the reconciliation.

Common Mistakes

Adjusting the bank side with journal entries. The bank will clear deposits in transit and outstanding checks on its own next month. Only book-side adjustments become entries.

Putting an item on the wrong side. Putting "interest earned" on the bank side is a common slip — the bank already added it, so it belongs on the book side. Same for fees the bank already deducted.

Mishandling errors. A company error is a book-side adjustment and produces a journal entry. A bank error goes on the bank side and is not journalized.

Skipping the second-column check. If both columns do not land on the same adjusted balance, the reconciliation is incomplete. The temptation to "round it off" produces broken books a month later.

Getting Help

Bank reconciliation is one of the routine controls that backs a clean set of cash records. For the underlying entries to Cash and other accounts, see recording journal entries, and for the broader picture of how cash actually moves through the financial statements, see statement of cash flows explained.

Conclusion

A bank reconciliation walks the bank's cash balance and the company's book cash balance toward the same true cash figure by adjusting each side for what it does not yet know. Outstanding checks and deposits in transit adjust the bank; interest, fees, NSF checks, and the company's own errors adjust the books. The adjustments on the book side become journal entries; the bank side resolves on its own. Get both columns to the same adjusted balance and the period's cash is reconciled.