Bank Reconciliation: Worked Example

By Ryan O'Connell, CFA, FRM Published November 5, 2026

A bank statement can show more cash than a business has already committed through checks, or less cash than the business has deposited near month-end. A bank reconciliation explains those differences and identifies the entries needed to bring the business’s records up to date. It helps you decide which balance is supported before using cash figures to plan payments or prepare financial statements.

This guide starts with a small cash receipts and disbursements journal, also called a cash book. You will calculate its balance, compare it with a bank statement at the same cutoff, reconcile both sides, and record every necessary book adjustment. All business names, dates, and dollar amounts in the worked example are hypothetical.

What Is a Bank Reconciliation?

A bank reconciliation is a schedule explaining the differences between the bank’s record of an account and the business’s own record of that account at a specified date. Differences can arise from processing timing, missing transactions, or errors in either record.^[1]

“Adjusting the bank side” means adjusting a reconciliation schedule. It does not mean editing the bank statement or posting a journal entry into the bank’s system. A bank error must be reported to the bank for correction.^[2]

Cash Book vs. Ledger, Bank Statement, and Online Balance

A cash book records receipts and payments in date order. In this article, its bank column covers one checking account; it excludes petty cash and other bank accounts. Businesses can keep separate receipts and disbursements journals instead. The IRS describes journals as transaction records and ledgers as records organized by account.^[3]

The first two are business accounting records; the next three come from the bank; the last is a financial report. A cash book can also serve a ledger function in some systems. Follow the actual posting arrangement rather than entering the same cash movement twice.

TD Bank’s explanation uses “posted,” “ledger,” and “current” for completed transactions and distinguishes available funds after certain holds and pending items.^[4] U.S. Bank explicitly warns that its available balance can omit uncashed checks and some scheduled or authorized payments.^[5] These are explanations of bank practices, not recommendations of either provider. Check your own bank’s definitions.

For the debit and credit rules behind the ledger, see double-entry accounting. For the distinct financial-reporting task, see statement of cash flows preparation.

Start with the Cash Book: A Worked Example

Maintain a reference for each receipt or payment and retain its support. D1 through D4 identify deposits; 201 through 205 identify issued checks. The receipt and payment columns below show amounts as originally recorded, and the final column carries the running book balance.

Recorded receipts total $4,000 + $2,500 + $900 + $1,800 = $9,200. Recorded payments total $1,200 + $860 + $1,500 + $1,100 + $400 = $5,060. Recalculate the balance before investigating the bank:

The arithmetic agrees with the original ledger, but the $860 entry is still wrong. Agreement between the cash book and ledger only confirms that these records contain the same postings. Matching those postings to independent evidence is the next task.

How to Reconcile the Cash Book to the Bank Statement

Use the same account, currency, and November 30 cutoff. Gather the statement, cash-book and ledger detail, previous reconciliation, deposit confirmations, check images, and supporting invoices. Compare identifiers and amounts, not just totals. The IRS’s procedure calls for checking deposits and individual checks, then updating unrecorded or incorrect book items.^[1]

1. Confirm the opening position. Carry forward genuine prior outstanding items and check whether they cleared. Harbor has none.
2. Match receipts. A deposit can combine several customer payments, so reconcile its components as well as its total.
3. Match payments. Compare check numbers, payees, amounts, and posting dates; include electronic payments and transfers when present.
4. Investigate every unmatched item. Establish whether it is timing, a valid unrecorded transaction, a business recording error, or a bank error.
5. Prepare both sides and post supported book entries. Recalculate the ledger after posting and retain a list of unresolved bank-side items for follow-up.

Harbor’s November Bank Statement

The bank posts check 202 at its actual $680 amount. It also returns the previously deposited $900 customer check D3 for nonsufficient funds, credits $40 of interest, and deducts a $30 service fee. None of those three bank-originated items has yet been entered in Harbor’s books. An unrelated $250 debit is also on the statement; the bank confirms that it belongs to another customer and will restore the money.

D4 is absent because it was deposited after the November 30 processing cutoff. Checks 204 and 205 have not cleared by that date. The following table shows bank posting dates, which need not match the cash-book dates.

Statement increases total $4,000 + $2,500 + $900 + $40 = $7,440. Decreases total $1,200 + $680 + $1,500 + $900 + $250 + $30 = $4,560. Therefore $10,000 + $7,440 − $4,560 = $12,880. The original book balance exceeds it by $14,140 − $12,880 = $1,260; that difference alone tells us neither which record is wrong nor whether fraud occurred.

Classify the Differences Before Calculating

Two timing terms determine the bank-side adjustments. A deposit in transit has been recorded by the business and deposited, but is not yet recorded by the bank. An outstanding check has already reduced the business’s books but has not cleared the bank.^[6]

• D4, $1,800: add to the bank side. Harbor has already recorded the receipt.
• Checks 204 and 205, $1,100 and $400: subtract from the bank side. Harbor has already recorded both payments.
• Confirmed bank-only debit, $250: add back on the bank side because it understates the bank’s balance. The bank must correct it.
• Interest, fee, and customer NSF return: update the book side because valid bank activity is missing there.
• Check 202 recording error: update the book side because Harbor recorded a $680 payment as $860.

Classify by whose record needs a change, then determine the sign. The phrase “bank charge” does not settle the question: a valid fee belongs in the books, while this confirmed wrong-customer debit is a bank error.

The Completed Bank Reconciliation

Start with the $12,880 statement balance. D4 adds $1,800, the two outstanding checks subtract $1,500 in total, and reversing the confirmed bank error adds $250. These items explain what the bank’s record has not yet reflected correctly at November 30.

$12,880 + $1,800 − $1,100 − $400 + $250 = $13,430. This is a net upward reconciliation adjustment of $550. It leaves the original statement intact and identifies items requiring later clearing or bank correction.

Now start separately with Harbor’s $14,140 book balance. Add the $40 interest, subtract the $30 fee and $900 returned customer check, and correct check 202. Harbor overstated that payment by $860 − $680 = $180, so Cash needs to increase by $180.

$14,140 + $40 − $30 − $900 + $180 = $13,430. The books need a net reduction of $710. Both schedules reach the same supported balance, but the book-side entries still need to be journalized and posted. A completed worksheet does not update the ledger by itself.

Bank Reconciliation Adjusting Journal Entries

Bank reconciliation adjustments include omitted transactions and corrections to errors. Introductory textbooks sometimes distinguish these correcting entries from accrual and deferral adjusting entries. Here, “adjusting entries” means the entries needed to implement the reconciliation. Every entry below is dated November 30 and balances separately.^[6]

A1: Record the $40 Interest Credit

The statement supports $40 of interest earned and credited during November. Because Harbor has not previously accrued or recorded it, debit Cash and credit Interest Revenue.

If interest had already been accrued as a receivable, collection would reduce that receivable instead of recognizing the same revenue again. Establish what is already in the books before selecting the offset account.

A2: Record the $30 Bank Service Fee

The valid fee has reduced the bank account but is missing from Harbor’s books. Record the cost and reduce Cash.

A3: Reverse the $900 Customer Collection Returned NSF

D3 originally debited Cash and credited Accounts Receivable. The bank later reverses that deposit because the customer’s check is unpaid. Restore the amount the customer owes and remove the unsupported cash collection.^[6]

This entry neither earns new revenue nor automatically writes off the customer balance. Evaluate collection risk separately; see accounts receivable and bad-debt accounting. Any separately imposed return fee would require its own supported treatment; none is assumed here.

A4: Correct Harbor’s $180 Overstatement of Check 202

The invoice, issued-check record, and bank image show a $680 supplies payment. Harbor originally debited Supplies Expense and credited Cash for $860, overstating both the expense and the cash reduction by $180. Reverse only that excess.

Supplies Expense becomes $860 − $180 = $680. The offset is Supplies Expense because that is the account Harbor originally overstated. If the mistaken payment had reduced Accounts Payable instead, the correcting credit would need to restore that payable. An error correction follows the actual original entry.

Post and Recheck the Cash Account

A1 and A4 debit Cash by $40 + $180 = $220. A2 and A3 credit Cash by $30 + $900 = $930. After posting:

Across all four entries, total debits and credits each equal $40 + $30 + $900 + $180 = $1,150. Check each entry’s equality as well as that combined total. The accounting cycle places the updated ledger balances into the wider period-end reporting process.

Verify Clearing, Old Items, and Bank Corrections

A reconciled total does not end the investigation of outstanding items. Utah’s State Auditor guidance emphasizes checking uncleared transactions and researching old items that may never clear.^[7] Retain the November schedule and inspect subsequent activity as evidence about those existing items.

Suppose the following events occur in early December. These dates are hypothetical follow-up observations, not mandatory clearing periods. Keep the November 30 reconciliation date fixed.

With no other transactions, these bank movements total $1,800 − $1,100 + $250 − $400 = $550. The bank’s balance becomes $12,880 + $550 = $13,430, while Harbor’s corrected books stay at $13,430. The previously listed differences disappear without re-entering them in the books.

For a deposit that does not appear when expected, trace the deposit confirmation, amount, destination account, and bank response. For an old check, examine the payee, original obligation, possible duplicate payment, and any stop-payment or replacement history. Age alone does not establish that the obligation has disappeared. Resolve the facts and applicable requirements before making a supported cancellation, replacement, or other entry.

Contact the bank promptly about a suspected bank error or unauthorized transaction and preserve the case reference and response. A suspected error is not a confirmed recoverable amount merely because adding it makes a worksheet balance. Harbor’s $250 treatment depends on the explicit confirmation in the example.

Small-Business Controls and Independent Review

Separate payment authorization, cash custody, recording, and reconciliation where practical. When staffing makes that impossible, arrange a meaningful review by someone who did not perform the same work. New York’s Comptroller describes supervisory review as a compensating control for small offices.^[2] This is a useful control principle to adapt, not a claim that private businesses must follow local-government staffing rules.

For example, an owner can review a bookkeeper’s reconciliation using a statement obtained directly from the bank. If the owner handles the entire process, an outside bookkeeper or accountant can provide a separate periodic review. Examine unusual payees, duplicate amounts, unexplained transfers, old reconciling items, and the supporting documents for corrections; approving the final number alone provides little challenge.

Record who prepared and reviewed the reconciliation, when they did it, and which follow-up items remain. Protect statements and check images because they contain sensitive account information. Scale the review to the transaction volume and risks rather than assuming a small business needs a large accounting department.

Bank Reconciliation vs. a Cash-Flow Statement

The SEC’s introductory financial-statement guide describes those three cash-flow categories.^[8] Harbor’s reconciliation supports one cash-account balance; it does not prepare all its financial statements. See how the three financial statements connect for the relationship between cash, profit, and the balance sheet.

Reconciliation also differs from forecasting liquidity. Knowing that $13,430 is supported at a past cutoff does not reveal next week’s collections or bills. Working capital management considers those operating timing needs, while financial ratio analysis places cash alongside other assets and obligations.

Common Bank Reconciliation Mistakes

• Using different cutoff dates. A December live balance cannot replace the November 30 statement balance without separating later activity.
• Reversing the timing signs. Add deposits in transit to the bank side; subtract outstanding checks. The books already contain them.
• Recording every unmatched bank item as an expense. First distinguish valid transactions from errors and identify the correct offset account.
• Fixing the bank side for a business error. Check 202 cleared correctly at $680; Harbor’s $860 record is what needs correction.
• Calling an NSF customer check an immediate bad-debt write-off. Reverse the collection and evaluate the restored receivable separately.
• Importing a bank feed without checking existing entries. A feed can duplicate a receipt, a check, or a correction already recorded elsewhere.
• Rolling old items forward indefinitely. Investigate their support and eventual resolution rather than treating the list as permanent.
• Posting an unexplained plug. A difference is a research task, not evidence for an arbitrary “miscellaneous expense” or income entry.

Limitations of Bank Reconciliation

Review the activity and its support as well as the final balance. A discrepancy can be an ordinary timing difference or an error; it is not by itself proof of fraud. Equally, a clean reconciliation does not rule out fraud. Independent review and examination of unusual items strengthen the control.

The example isolates one account and excludes many real-world issues, including merchant settlement batches, restricted cash, foreign currencies, credit-loss estimates, and disputed recoveries. A confirmed bank error with a known correction is simpler than an unresolved loss. Accounting conclusions must follow the evidence and applicable guidance; the GAAP conceptual framework provides broader recognition and reporting context.

The mechanics of matching records are useful beyond U.S. accounting, but this article does not compare individual U.S. GAAP and IFRS recognition or presentation requirements. It also does not set bank dispute deadlines, unclaimed-property rules, or a mandatory reconciliation procedure for every jurisdiction.

Sources

Sources accessed November 5, 2026. Harbor Workshop and all business values are hypothetical. Government control manuals below address their own public-sector settings; this article adapts relevant practices for education without making their staffing or reporting rules private-business legal requirements.

1. IRS, Publication 583: Starting a Business and Keeping Records, December 2024 revision, Recordkeeping: Reconciling the checking account.
2. New York State Office of the State Comptroller, The Practice of Internal Controls, printed page 3, bank-reconciliation controls on pages 16–18, and Appendix A on pages 65–66. No revision date established from the accessed document.
3. IRS, How should I record my business transactions?, journals, ledgers, cash-receipts summaries, and check-disbursements journals.
4. TD Bank, Available Balance vs. Posted Balance: What’s the Difference?, posted-balance definition and pending-activity distinctions; bank educational guidance.
5. U.S. Bank, How do I find an explanation for the available balance in my checking account?, More information: transactions not reflected in available balance.
6. OpenStax, Rice University, Principles of Accounting, Volume 1: Financial Accounting, section 8.6, reconciliation categories, returned customer checks, and book-correction entries. Educational textbook explanation, not authoritative U.S. GAAP.
7. Utah Office of the State Auditor, Bank Reconciliation, Implementation and Monitoring, including investigation of uncleared and old items.
8. SEC, Beginners’ Guide to Financial Statement, Cash Flow Statements. Displayed February 4, 2007; reviewed/updated February 5, 2007.