The short answer
A bank reconciliation compares the balance on the bank statement with the cash balance in the books for the same date, explains every difference, and corrects the books where needed. When the adjusted bank balance equals the adjusted book balance, the account is reconciled.
Why it matters
Reconciliations catch missing transactions, duplicates, bank fees, bounced cheques and fraud early. Clients, auditors and the CRA all rely on reconciled books, and sales tax returns built on unreconciled books are a common source of errors.
Six steps
- Get the statement and the ledger for the same period end.
- Tick off matching items: every deposit and payment that appears in both.
- List outstanding items in the books but not yet on the statement: deposits in transit and uncleared cheques.
- List bank-only items on the statement but not yet in the books: bank fees, interest, direct debits, returned payments.
- Record the bank-only items in the books and fix any errors you found.
- Prove it: the adjusted bank balance must equal the adjusted book balance.
Worked example
| Bank side | Amount | Book side | Amount |
|---|---|---|---|
| Balance per bank statement | 12,950.00 | Balance per books | 12,535.00 |
| Add: deposit in transit | 1,200.00 | Less: bank service fee | (25.00) |
| Less: outstanding cheque #1042 | (1,670.00) | Less: customer cheque returned (NSF) | (30.00) |
| Adjusted bank balance | 12,480.00 | Adjusted book balance | 12,480.00 |
Both sides agree at 12,480.00, so the account is reconciled. The two book-side items (the fee and the returned cheque) are now recorded as journal entries.
Reconciling in QuickBooks and Xero
Software speeds up the matching but does not replace understanding. In QuickBooks Online you match bank feed transactions, then run the Reconcile tool against the statement ending balance. In Xero you match statement lines on the Reconcile screen and review the reconciliation report. QuickBooks Desktop uses a similar reconcile window where you tick cleared items.
Bank reconciliation is practised in every RAI software package. Compare them on packages & fees.