A bank reconciliation matches the cash balance in a company's ledger to the balance on its bank statement by adjusting each side for timing differences and errors until the two agree. The bank side is adjusted for deposits in transit and outstanding checks; the book side is adjusted for items the bank recorded first, such as service charges, NSF checks, and interest. When both adjusted balances land on the same number, that number is the company's true cash balance.
The two starting balances almost never match on their own, and that is normal. The company records a check the day it is written; the bank records it days later, when it clears. The bank deducts a monthly fee the company doesn't learn about until the statement arrives. A reconciliation is the procedure that explains every dollar of the difference. Any gap that a known timing item can't explain is an error — or occasionally fraud — which is why reconciliations are a standard internal control, usually prepared once a month as of the statement date.
A bank reconciliation is worked in two columns. One column starts from the balance per bank — the ending balance on the bank statement. The other starts from the balance per books — the ending balance of the Cash account in the general ledger. You adjust each column only for the items that side doesn't know about yet, and both columns must arrive at the same adjusted balance.
Bank balance + Deposits in transit − Outstanding checks = Adjusted balance = Book balance + Collections + Interest − Service charges − NSF checks
Bank balance — Ending cash balance shown on the bank statement
Deposits in transit — Receipts already recorded in the ledger that the bank hasn't posted yet
Outstanding checks — Checks written and recorded in the ledger that haven't cleared the bank
Book balance — Ending balance of the Cash account in the general ledger
Collections — Notes or receivables the bank collected on the company's behalf
Interest — Interest the bank credited to the account during the period
Service charges — Bank fees that appear only on the statement
NSF checks — Customer checks returned unpaid — "not sufficient funds"
Cash receipts the company recorded — usually a deposit made late on the last day of the month — that the bank hadn't processed by the statement date. The ledger already includes them, so they are added to the bank balance. Find them by comparing the deposits listed on the statement against the deposits in the cash receipts journal; anything in the journal but not on the statement is in transit.
Checks the company wrote and recorded that hadn't cleared the bank by the statement date. The ledger already subtracted them, so they are subtracted from the bank balance. Find them by ticking off cleared checks on the statement against the check register; unticked checks are outstanding. Don't forget checks still outstanding from prior months.
Banks sometimes collect a note receivable for a depositor, and most accounts earn some interest. Both show up on the statement before the company hears about them, so they are added to the book balance.
Monthly account fees, wire fees, and check-printing charges appear only on the statement, so they are subtracted from the book balance. So is an NSF check: a customer paid you, you recorded the receipt, and the check bounced — the money you thought you had never arrived, so it comes back out of the books and goes back into accounts receivable.
Harlan Supply Co. is reconciling its checking account at June 30. The bank statement shows $9,847.20. The Cash account in the ledger shows $9,689.90. Comparing the statement to the ledger turns up a June 30 deposit of $1,362.50 the bank hasn't posted, two outstanding checks (#2141 for $918.40 and #2145 for $286.75, totaling $1,205.15), a $520.00 note the bank collected for Harlan, $8.15 of interest earned, a $35.00 service charge, and a $178.50 customer check returned NSF.
| Item | Bank side | Book side |
|---|---|---|
| Unadjusted balance, June 30 | $9,847.20 | $9,689.90 |
| Add: deposit in transit (June 30 receipt) | +1,362.50 | — |
| Less: outstanding checks (#2141, #2145) | −1,205.15 | — |
| Add: note collected by bank | — | +520.00 |
| Add: interest earned | — | +8.15 |
| Less: bank service charge | — | −35.00 |
| Less: NSF check returned | — | −178.50 |
| Adjusted cash balance | $10,004.55 | $10,004.55 |
Both sides reconcile to $10,004.55, so that is Harlan's true cash balance at June 30 — the figure that belongs on the balance sheet. The bank-side math: $9,847.20 + $1,362.50 − $1,205.15 = $10,004.55. The book-side math: $9,689.90 + $520.00 + $8.15 − $35.00 − $178.50 = $10,004.55.
The reconciliation isn't finished yet, though. The ledger still says $9,689.90, so Harlan records journal entries for the book-side items only:
Dr Cash 520.00 / Cr Notes Receivable 520.00 — the note the bank collectedDr Cash 8.15 / Cr Interest Revenue 8.15 — interest earnedDr Bank Fees Expense 35.00 / Cr Cash 35.00 — the service chargeDr Accounts Receivable 178.50 / Cr Cash 178.50 — the NSF check, put back on the customer's accountThe net effect on Cash is +$520.00 + $8.15 − $35.00 − $178.50 = +$314.65, which moves the ledger from $9,689.90 to $10,004.55. No entries are made for the deposit in transit or the outstanding checks — the ledger already recorded those; the bank just hasn't caught up.
The sorting rule is simple: put each item on the side that doesn't know about it yet.
Bank-side adjustments (the ledger already has them; the bank is behind):
Book-side adjustments (the bank already has them; the ledger is behind):
Only the book-side items ever need journal entries, because only the ledger can be edited by the company. Bank-side items are timing differences that resolve themselves when the bank catches up; if a bank error surfaces, you notify the bank rather than adjust your books.
Adjusting the wrong side. The most common exam error is adding a deposit in transit to the books or deducting a service charge from the bank balance. Ask one question about each item: who hasn't recorded this yet? The deposit in transit is already in the ledger — the bank is the one that's behind, so it adjusts the bank side. The service charge is already on the statement — the ledger is behind, so it adjusts the book side.
Stopping before the journal entries. A reconciliation that balances is only half done. Every book-side adjustment needs an entry, or the Cash account keeps its stale $9,689.90 while the balance sheet claims $10,004.55. If an exam problem asks for "the entries required by the reconciliation," it means the book-side items — never the deposits in transit or outstanding checks.
Getting the NSF sign backwards. Students see a returned customer check and instinctively add it, reasoning that a check from a customer means money in. It is the opposite. The receipt was already recorded when the check arrived; NSF means that cash never materialized, so it must come out of the book balance — and back into Accounts Receivable, because the customer still owes you.
Adjust each side only for what it doesn't know yet — deposits in transit and outstanding checks fix the bank balance; collections, interest, fees, and NSF checks fix the book balance. The reconciliation is done when both sides show the same adjusted cash and every book-side item has a journal entry.
It is a schedule that explains the difference between the cash balance on the bank statement and the cash balance in the company's ledger. Each balance is adjusted for items the other side has already recorded, and when both adjusted balances match, that shared figure is the true cash balance.
Both go on the bank side, because the ledger has already recorded them and the bank hasn't. Deposits in transit are added to the bank balance; outstanding checks are subtracted from it. Neither one gets a journal entry.
No — only for the book side. Bank-side items are timing differences that clear on their own once the bank processes them. Book-side items (bank collections, interest, service charges, NSF checks, book errors) are real changes to cash the ledger hasn't captured, so each one needs an entry.
When the customer's check arrived, the company debited Cash and credited Accounts Receivable. NSF means the check bounced, so that cash never actually came in. The company reverses the receipt — debit Accounts Receivable, credit Cash — which reduces the book balance and puts the amount back on the customer's account.
Recheck the arithmetic first, then look for an item placed on the wrong side or given the wrong sign. If the difference is divisible by 9, suspect a transposition error (for example, recording $918.40 as $981.40). A difference that matches one specific transaction usually means that item was missed entirely.
Monthly at minimum, as of each bank statement date — that frequency is what makes it an effective internal control. Businesses with heavy transaction volume often reconcile weekly or daily, which catches errors and unauthorized withdrawals sooner.
By the FinanceBrain Team · Last verified July 10, 2026 · How we produce and verify articles