Bank reconciliation: why the bank statement and books disagree

The balance in the accounting software rarely matches the bank statement merely because both carry the same account number. The books record what the business believes it paid and received. The bank statement records what the bank has processed. A bank reconciliation explains every difference between the two at one date.

Some differences are temporary. A cheque may be entered in the books before the payee presents it. Other differences show that the books are incomplete: bank charges, interest, direct customer deposits or a returned cheque may appear first in the statement. A third group consists of errors or unusual transactions that need investigation.

ICAI describes a bank reconciliation statement as the reconciliation of the bank column of the cash book with the bank statement. Its teaching material separates timing differences, bank-only transactions and errors. ICAI, Bank Reconciliation Statement.

Begin with the same account, date and balance type

Use the ledger for one bank account and the statement for that same account up to the same closing date. Mixing a 31 August ledger with a statement downloaded on 3 September can bring later transactions into one side.

Confirm whether the figure is positive cash or an overdraft. The accounting ledger and bank statement may display debit and credit balances from opposite viewpoints. Work with signed amounts consistently rather than changing signs by instinct.

Then mark the last transaction that cleared on both sides. Matching from that point forward is usually faster than comparing monthly totals, because equal totals can conceal two offsetting errors.

Correct the books before treating an item as timing

An item that the bank has processed but the books have not recorded belongs in the books. Common examples include:

• bank charges and interest;

• automatic loan instalments, insurance or subscriptions;

• interest credited by the bank;

• customer receipts paid directly into the account;

• returned or dishonoured collections.

Post these entries with the correct ledger classification and evidence. A loan debit may contain principal and interest, so copying the whole amount to interest expense would fix the bank balance while damaging the profit figure and loan schedule.

After the books are corrected, the reconciliation may still contain genuine timing items and separately identified bank errors or investigation exceptions. Cheques issued but not yet presented and deposits recorded but not yet cleared usually fit the timing category. They require no fresh accounting entry if the original entry is correct; they need follow-up until they clear or are cancelled properly.

A hypothetical reconciliation

Assume the bank ledger shows ₹8,40,000 on 31 August. Review of the statement identifies four transactions missing from the books:

The direct receipt must also be posted against the correct customer. The returned cheque reopens that customer’s balance. Without those ledger entries, receivables would be wrong even if someone forced the bank total to agree.

Three differences remain after the books are adjusted:

The ₹1,50,000 deposit and ₹2,10,000 of unpresented cheques are timing differences supported by the next statement. The ₹30,000 debit is different. It remains an exception until the bank explains it and either the business records a valid transaction or the bank reverses the debit. If reversed, the corrected bank balance would be ₹9,77,000, equal to the adjusted books after the two timing items are applied.

This illustration assumes all listed items belong to the same account, there are no foreign-currency effects, and the figures include every transaction up to the cut-off.

Age matters more than the count of differences

A long reconciliation with yesterday’s card settlements may be healthy. A short reconciliation containing one six-month-old cheque can be a problem.

Age outstanding deposits from the date recorded in the books. A deposit that does not clear within the normal channel time may be a failed transfer, wrong bank entry or posting to the wrong account. Check later statements and the payment reference rather than carrying it forward each month.

Review old unpresented cheques with the payee and payment owner. The liability may still be due even if the cheque is stale or lost. Cancelling a payment entry without checking the underlying payable can understate creditors.

Repeated round-sum transfers, unfamiliar payees, duplicate debits and changes to beneficiary details deserve separate evidence. A reconciliation can reveal them, but it does not by itself establish whether a transaction was authorised.

Make the reconciliation reviewable

Keep a schedule with the transaction date, bank value date, amount, reference, reason, owner and expected clearance date. Attach the bank statement and ledger extract used. For each book adjustment, retain the voucher or journal reference. For each timing item, link the later clearance or record why it remains open.

Someone other than the preparer should review material and aged items where the team permits. The review should test the source balances and supporting records, not only the arithmetic. A reconciliation that agrees because an unexplained amount was posted to “suspense” has postponed the question.

Close the month only when the adjusted book balance is established, the statement balance is independently agreed, and every remaining difference has a named reason and next action. Carry the open list into the following month and remove an item only when the books and bank provide evidence that it cleared.