The cash in your books and the cash on the bank statement can both be wrong on the same day. The gap is not always a missing dollar. A check you recorded may sit unpaid. A fee may sit on the statement and nowhere in the books.
Bank reconciliation explained for a small business is the comparison that turns those two numbers into one cash balance you can trust. IRS Publication 583 says you reconcile the business checking account every month. That one habit is how you know the balance is real before you spend it.
Key Takeaways
- The raw endings do not have to match. Publication 583 says the statement can include bank charges you have not entered. It can omit deposits made after the statement date and checks that have not cleared.
- You adjust both sides. AccountingCoach says you add deposits in transit to the bank balance and subtract outstanding checks. Fees and interest and returned items change the books.
- You record only the book side. The bank will clear a deposit in transit when it processes the deposit. AccountingCoach says the company makes no journal entry for the bank-side items.
- A match is not proof against every theft. AccountingCoach says cash stolen before anyone records it will not show up on the reconciliation.
- Do it on a schedule. The IRS says each month. AccountingCoach says online banking lets you do it during the month and at month end. Bench says a high-volume shop may do it daily.
Table of Contents
Why reconcile the bank account
Why reconcile the bank account is a cash question. Publication 583 says the reconciliation verifies how much money is in the account. It puts every bank charge into the checkbook and the books. The same work corrects an error in the statement or the checkbook or the books.
AccountingCoach gives the same purpose in ledger language. The reconciliation makes the Cash account complete. With that balance you can avoid an overdraft. You can avoid putting the wrong cash amount on the balance sheet. You can spot an error in the bank’s records.
SCORE’s bank reconciliation article describes the work as a comparison of the monthly statement to your internal records. SCORE says a gap can be an oversight or a service fee or an outstanding check. Find the cause and resolve it. SCORE says the review helps you catch a bank error and activity that may be fraud.
Bench’s April 2025 guide adds the cash-flow view. You see the gap between the day money enters the business and the day it enters the bank. Bench’s fraud pictures are specific. A vendor can alter a check so the bank pays more than you recorded. A partner can withdraw more than the books show. You see that gap when you reconcile. Bench says the work will not stop the fraud. It tells you the fraud happened.
Bench describes an accounts-receivable miss. You record cash because a client says the check is in the mail. The next month the reconciliation shows the check never arrived. That picture is Bench’s. It depends on recording the cash before the bank has it.
Two balances
Bookkeeping reconciliation starts with two cash numbers for the same date. One is the ending balance on the bank statement. The other is the Cash account in your books. Bench says those two endings rarely match even when the books are careful. A fee can be the reason. A transfer can be delayed. An NSF check can have bounced after you recorded it as a normal payment.
AccountingCoach says that in a common month neither unadjusted balance is the true cash. You adjust both. The adjusted bank balance and the adjusted book balance must be the same amount. That shared amount is the cash you report.
The bank’s words run the other direction from yours. AccountingCoach explains why. Your checking balance is a liability on the bank’s books. When you deposit money, the bank credits that liability and your balance goes up. When the bank pays your check, it debits that liability and your balance goes down. On your books, a deposit is a debit to Cash and a check is a credit to Cash. A “credit” on the statement is money in. A “debit” on the statement is money out.
AccountingCoach’s shortcut is to put the item where it is not.
- A deposit or a check that is in your Cash account and missing from the statement goes on the bank side.
- A fee or interest or a bank memo that is on the statement and missing from Cash goes on the book side.
How to reconcile a bank account
How to reconcile a bank account is the bank reconciliation process in a short sequence. You reconcile books with the bank statement. Do it in this order. Publication 583 and AccountingCoach describe the same job in different words.
1. Update the books first. SCORE says you enter every outgoing check and every bill you paid before you start. Publication 583 says you prove your own figures before you touch the statement. Start with last month’s checkbook balance. Add the month’s deposits. Subtract the month’s payments. The result should equal the checkbook balance at month end. If it does not, compare the check stubs with the disbursements journal. Compare the deposits with the cash receipts record. Then refigure the running balance.
2. Compare every deposit and every check. Publication 583 says you match each deposit on the statement to the checkbook and note every dollar difference. You match each canceled check by number and by amount. Mark the checks that cleared. The unmarked checks are outstanding. AccountingCoach adds the other statement lines. Fees. Returned checks. Collections the bank made for you. SCORE says you match the statement deposits to your deposit slips. SCORE says a large gap is a reason to look at last month’s deposits and withdrawals. Those items may have landed on this statement.
3. Adjust the bank balance. Start with the statement balance.
- Add deposits in transit. AccountingCoach defines them as receipts you recorded that the bank has not processed by the reconciliation date. SCORE says a recent deposit missing from the statement increases the ending bank balance.
- Subtract outstanding checks. These are checks you recorded that the bank has not paid. SCORE says you deduct them from the ending bank balance. AccountingCoach says a few checks from earlier months can remain outstanding.
- Add or subtract a bank error. AccountingCoach’s example is a check for eight hundred sixty-seven dollars that the bank paid as eight hundred seventy-six dollars. The bank took nine dollars too much. You add nine dollars on the bank side. You call the bank. You do not change your books. Your Cash account has the right amount.
4. Adjust the book balance. Start with the unadjusted Cash account.
- Add items the bank put in that you have not recorded. Interest. A credit memo. A note the bank collected.
- Subtract items the bank took out that you have not recorded. Service charges. An overdraft fee. A returned item. A debit memo.
- Add or subtract your own errors. Publication 583’s sample owner entered a deposit of six hundred dollars and forty cents as five hundred ninety-four dollars and forty cents. The fix is to add the six-dollar difference.
5. Require one number. AccountingCoach says the adjusted balance per bank must equal the adjusted balance per books. Publication 583 says the same thing in checkbook language. If they differ, go back through the steps.
6. Post only the book adjustments. AccountingCoach says each book-side item needs a journal entry. One side of the entry is Cash. A twenty-five-dollar service charge is a credit to Cash and a debit to an account such as Bank Fees Expense. After you post, the Cash account must equal the adjusted book balance on the reconciliation. You do not journalize the outstanding checks or the deposits in transit. Bench says the bank balance changes on its own when the bank processes those items.
A simple bank reconciliation
Simple bank reconciliation is easier to see with AccountingCoach’s round numbers. The company opened the account and wrote checks and made one late deposit. The figures are AccountingCoach’s illustration.
| Item | Amount |
|---|---|
| Cash in the books before the reconciliation | Seven thousand dollars |
| Bank statement balance | Five thousand nine hundred seventy-five dollars |
| Service charge on the statement and missing from the books | Twenty-five dollars |
| Deposit recorded in the books and missing from the statement | Two thousand dollars |
| Check recorded in the books and missing from the statement | One thousand dollars |
The books fall by twenty-five dollars. The adjusted book balance is six thousand nine hundred seventy-five dollars.
The bank side rises by the two-thousand-dollar deposit and falls by the one-thousand-dollar check. Five thousand nine hundred seventy-five dollars plus two thousand dollars minus one thousand dollars is the same six thousand nine hundred seventy-five dollars.
The statement is reconciled. The balance sheet cash is that shared amount. It is not the raw seven thousand dollars. It is not the raw statement balance.
Publication 583 walks through the same shape with a sample owner named Henry. These are the publication’s January figures.
| Step on Henry’s reconciliation | Amount |
|---|---|
| Closing balance on the bank statement | $1,458.12 |
| Two deposits in the checkbook and missing from the statement | $701.33 and $516.08 |
| Subtotal | $2,675.53 |
| Outstanding checks | $526.50 |
| Adjusted bank balance | $2,149.03 |
| Checkbook balance before the fee and the deposit fix | $2,153.03 |
| Deposit recorded six dollars too low | Add $6.00 |
| Bank service charge | Subtract $10.00 |
| Adjusted checkbook balance | $2,149.03 |
The two adjusted balances match. That is the point of the page.
What belongs on each side
Use this split when a line surprises you.
| You find this | Where it goes | What you record |
|---|---|---|
| Deposit you recorded and the bank has not processed | Add it to the bank balance | No journal entry |
| Check you wrote and the bank has not paid | Subtract it from the bank balance | No journal entry |
| Bank fee or overdraft fee or returned-check fee | Subtract it from the books | Credit Cash |
| Interest or another bank credit memo | Add it to the books | Debit Cash |
| Customer’s check you deposited and the bank returned | Subtract it from the books | Credit Cash |
| ACH or EFT or Zelle or a wire missing from the books | Book side, up or down | Debit or credit Cash |
| Bank paid the wrong amount | Bank side | Call the bank. No book entry if your Cash amount was right |
| You typed the wrong amount | Book side | Correct Cash |
AccountingCoach says a difference that divides evenly by nine is a clue. Seven hundred eighty-nine recorded as seven hundred ninety-eight leaves a difference of nine. One thousand four hundred fifty-eight recorded as one thousand five hundred forty-eight leaves a difference of ninety. Five hundred recorded as five thousand leaves a difference of four thousand five hundred. Each of those differences divides by nine. Look for switched digits or a dropped zero before you hunt every line.
An NSF check and a return item are book-side decreases when the bank has taken the money back. AccountingCoach says an NSF check is one the bank refused because collected funds were short. A return item can be that check. It can be a check on a closed account. It can be a check the maker stopped. SCORE tells you to look for service fees and overdraft fees and returned-check fees on the statement.
A stop-payment order is your instruction not to pay a check the bank has not paid yet. AccountingCoach says the bank charges a fee for that work. The fee belongs on the book side if you have not recorded it.
Monthly bank reconciliation
Monthly bank reconciliation is the IRS rhythm. Publication 583 says you reconcile each month. SCORE says you pick a date and keep it. If the statement arrives by mail, do not put it in a drawer. If you can open it online, use that same date.
AccountingCoach says online banking changes the timing. You can reconcile during the month and again at month end. You see the checking balance more than once. You correct an error in the same month.
Bench ties the rhythm to volume. A restaurant or a busy retail store may reconcile daily so the cash receipts hit the bank. A small online store with quiet days may reconcile weekly or monthly. Bench says a six-month pile means you recheck six months of lines. A set schedule keeps that pile from forming. The IRS monthly duty is the floor. A busier account can need a shorter cycle. This article does not set a transaction count that forces a daily reconciliation.
SCORE’s financial-controls article adds a separation step. Reconcile the company records to the statements. Have the statements sent to your personal email or your home address. AccountingCoach says an independent person should prepare the reconciliation. That person should not be the one who signs the checks or keeps the records. A one-person shop cannot split every job. The owner can receive the statement directly and do the reconciliation. That is the control you have when there is no second person.
A cash-basis business reconciles too
Bench’s April 2025 article says you reconcile only if you use accrual accounting. Bench says a cash-basis business records each transaction at the same time the bank does, so the balance sheet and the statement should match.
Publication 583 does not split the duty that way. It says you reconcile every month because the statement can omit deposits made after the statement date and checks that have not cleared. It can include charges you have not entered. Those gaps show up when you record a check on the day you write it and the bank has not paid it yet. AccountingCoach uses that same timing. A check dated June 29 is in your Cash account on June 29 even if the bank pays it the following week. A Saturday receipt is in Cash on Saturday even if you deposit it the next Tuesday.
Follow the IRS and AccountingCoach. Reconcile the account on cash basis and on accrual. The method changes when you record income and expense. It does not erase an outstanding check.
Reconcile the business bank account
Reconcile the business bank account only after the account is the business account. Publication 583 says you open a business checking account and keep it apart from personal checking. Deposit the day’s receipts into that account. Pay expenses by check so the payment has a record. Write a check to yourself only for a personal withdrawal. Avoid a check payable to cash. If you must pay a business expense in cash, keep the receipt. If you cannot get a receipt, write an explanation in the records at the time you pay.
Note the source of each deposit in the checkbook and on the deposit slip. Keep a copy of the slip. Publication 583 says the checkbook is the main source for the books of many small businesses.
AccountingCoach says you keep a separate Cash account for each checking account. A payroll account is not the operating account. Bench says the same comparison applies past the bank. Reconcile credit cards and PayPal and any other account that holds business transactions. SCORE’s controls article says you review credit card and debit card statements and you collect receipts for employee card purchases.
A petty cash drawer is not the checking account. Publication 583’s sample uses a separate fund of fifty dollars. The slips plus the cash left in the drawer should equal that fifty dollars. Do not force the drawer into the bank reconciliation.
What the match cannot prove
AccountingCoach is plain about the limit. Equal adjusted balances do not prove every dollar is accounted for. If someone takes a cash receipt before it is recorded and before it is deposited, the reconciliation will not show the missing amount. The books and the bank both lack the same money. They can agree and the cash can be gone.
That is why the other controls exist. Deposit receipts. Pay by check. Keep the statement coming to you. Have a second person reconcile when you have one.
A difference that remains after the adjustments is an error to find. Publication 583 says you repeat the earlier steps. AccountingCoach says you contact the bank at once when the error is the bank’s.
How long to keep the reconciliation
The reconciliation supports the cash in the books. Publication 583 says you keep records that support an item of income or a deduction until the limitation period for that return ends. The usual period in Table 3 is three years after you file. A return filed before the due date counts as filed on the due date.
| If this is true | Publication 583’s period |
|---|---|
| You owe more tax and the special rows do not apply | 3 years |
| You omit income and it is more than 25 percent of the gross income on the return | 6 years |
| The return is fraudulent or you do not file | No limit |
| You claim a loss from worthless securities or a bad debt | 7 years |
| You have employees | Employment tax records for at least 4 years after the due date or the payment date. Use the date that falls second. |
An electronic statement has to meet the same test as paper. Publication 583 says the system must index and store and preserve and retrieve and reproduce a legible record. You keep that system for as long as the records matter for the tax law.
A month-end pass
- Prove the checkbook against the journals before you open the statement.
- Match every deposit and every cleared check. List the outstanding checks and the deposits in transit.
- List fees and interest and returned items and bank memos on the book side.
- List bank errors on the bank side and call the bank.
- Adjust both balances. Stop when they are the same number.
- Post the book-side entries. Confirm that Cash equals that number.
- If the difference divides by nine, look for switched digits.
- Save the reconciliation with the statement. Keep it for the period in Publication 583’s table.
QuickBooks Online is one place to post the fee and the interest and the returned item next to the bank account. The bank feed is the bank’s list. It is not the adjusted cash balance.
After the two adjusted balances match, the Cash account in QuickBooks Online should show that same amount. The software does not prove the match. You do. That proof is the reconciliation.
