A bank reconciliation agrees the closing balance on your bank statement with the bank balance in your ledger for the same date, and explains every difference. You match each bank line to a ledger entry, list the timing items, book what only the bank knows about, such as charges and profit credited, and have a second person review the result.
What is a bank reconciliation?
A bank reconciliation compares two records of the same money: the bank's statement and the bank account in your ledger. At the end of a period they rarely show the same balance. The reconciliation explains why, item by item, until the adjusted bank balance and the adjusted book balance agree.
Differences fall into two groups. Timing differences are entries both sides will record, just on different days: a payment you booked on the 30th that leaves the account on the 2nd. Missing or wrong entries need a correction: a bank charge never booked, a receipt posted twice, a payment booked to the wrong bank account.
The result is a short reconciliation statement for each account and period, with the evidence behind each item. It proves the cash figure on the balance sheet, and it is usually one of the first things an auditor asks for.
Why reconcile, and how often?
Reconcile every bank account at least once a month, before the month is signed off; it is a core step of any month-end close checklist. Reconcile busy accounts weekly or even daily, because a month of unmatched lines takes far longer to clear than a week of them.
Regular reconciliation catches errors while they are still easy to trace: duplicate supplier payments, customer receipts nobody applied, bank charges that crept up, and payments nobody recognises. That last item can be the first sign of fraud, and it is found far sooner when someone looks every week.
How do you reconcile a bank account, step by step?
- Get the full statement for the periodDownload the statement for the exact period, with its opening and closing balances. Use the bank's file rather than a screenshot or a PDF printout, so every line carries its date, amount and reference.
- Check the opening balanceThe statement's opening balance should equal last period's reconciled closing balance. If it does not, last period's reconciliation needs another look before you go on.
- Pull the ledger movementsExport the posted movements on the bank account for the same period, plus a few days either side to catch timing items.
- Match one to oneMatch each bank line to a ledger entry with the same direction and amount, within a few days. When several entries fit, use the reference (an invoice, voucher or transfer number) to pick the right one. Never match on amount alone when two candidates qualify.
- Match groupsSome lines clear several entries at once: one deposit of several cheques, a batch of supplier payments, card settlements paid net of the acquirer's fee. Match the group when the totals agree, and keep any fee difference for the adjusting journal.
- Explain the bank-only linesBank charges, profit or interest credited, standing orders and returned payments appear on the statement before they reach your books. Give each one a reason.
- List the book-only itemsPayments you issued that have not left the account and deposits the bank has not yet credited are timing items. List them; they should clear in the first days of the next period.
- Prepare the reconciliation statementStart from the bank's closing balance, add deposits in transit and deduct outstanding payments. Compare the result with the book balance after the bank-only items. The difference should be zero.
- Book the adjustmentsDraft journals for the bank-only items, have them approved and post them in the ERP, so the books carry the charges and the profit, not just the reconciliation.
- Review and sign offA second person reviews the reconciliation and the evidence, then signs it. Investigate any timing item still open after a month.
What does a bank reconciliation look like?
| Item | SAR |
|---|---|
| Balance per bank statement | 500,000 |
| Add: deposit in transit | 20,000 |
| Less: outstanding supplier payment | (30,000) |
| Adjusted bank balance | 490,000 |
| Balance per ledger | 489,000 |
| Less: bank charges not yet booked | (500) |
| Add: profit credited, not yet booked | 1,500 |
| Adjusted book balance | 490,000 |
| Difference | 0 |
In this example two journals follow: SAR 500 debited to bank charges and credited to the bank account, and SAR 1,500 debited to the bank account and credited to profit income. The SAR 30,000 payment and the SAR 20,000 receipt need no journal. Check that both clear in the first days of July.
What causes most reconciliation differences?
Most differences come from a short list of causes. Knowing them makes each one quick to clear.
| Cause | What you see | What to do |
|---|---|---|
| Timing | A payment or deposit in the books that the bank shows a few days later | List it as outstanding and check it clears next period |
| Bank charges and fees | Small debits on the statement that are not in the books | Book them, and set a rule for charges that recur |
| Profit or interest credited | A credit from the bank that is not in the books | Book it to profit or interest income |
| Net settlements | A card or payment-gateway deposit smaller than the sales booked | Match the group and book the fee difference |
| Batch deposits and payments | One bank line against several ledger entries | Match the group when the totals agree |
| Duplicates | The same receipt or payment booked twice | Reverse the duplicate in the ledger |
| Wrong bank account | An entry booked to another bank account in the ledger | Reclassify it to the right account |
| Unidentified receipts | Money in with no customer or reference | Hold it in suspense with an owner, then apply it |
| Returned payments | A payment out, then the same amount back | Reverse the payment and check the supplier's bank details before paying again |
Reconcile each account in its own currency. A US dollar account is reconciled in dollars against the dollar amounts in the ledger, and translation into riyals comes after. Otherwise an exchange rate can hide a real difference.
Which controls should surround the reconciliation?
The reconciliation is itself a control, so it needs its own safeguards. These are general good practice:
- Separate the roles. The person who records receipts or prepares payments should not be the only person who reconciles the bank, and someone other than the preparer should review the reconciliation.
- Investigate old items. A timing item still open after a month is no longer timing. Find out why.
- Control supplier bank details. Many payment frauds start with a changed bank account. Have a second person verify every change, using contact details you already hold, before the next payment.
- Lock the month. Once the month is signed off, a reconciled statement should not change. If it must, reopen it with a recorded reason.
- Keep the evidence: the statement, the matched items, the reason for each bank-only line and the reviewer's sign-off.
Our guide to approval matrices and segregation of duties covers how to split these roles, including in a small team.
What should you automate, and what should stay with a person?
Automate the matching and the routine explanations. Keep ambiguous matches, unidentified money and the sign-off with people.
- Automate: importing statements, one-to-one matching where exactly one ledger entry fits, explaining recurring items such as monthly charges by rule, suggesting group matches and drafting the adjusting journals.
- Keep with a person: choosing between several possible matches, applying unidentified receipts, writing anything off, approving journals and reviewing the reconciliation.
Keep matching rules strict. A small amount tolerance and a short date window give fewer automatic matches but far fewer wrong ones, and a wrong match hides a real difference until someone else finds it.
Questions people ask
What is the difference between a bank reconciliation and cash application?
A bank reconciliation agrees the bank account with the ledger. Cash application matches each customer receipt to the invoices it pays, so the receivables ledger is right. You need both: a receipt can be in the right bank account and still sit against the wrong customer.
What are deposits in transit and outstanding payments?
A deposit in transit is money you have booked as received that the bank has not yet credited. An outstanding payment is one you have booked and sent that has not yet left the account. Both are timing differences and should clear within days.
How should we treat money we cannot identify?
Do not book it to revenue. Hold it in a suspense account with an owner, ask the bank for the payer's details, and apply it once you know who paid and for what. Review suspense balances every month.
Can bank reconciliation be fully automated?
Most of the matching can be, when the rules are strict and the bank's data carries references. Ambiguous matches, unidentified receipts and the final review still need a person, and they should.
Should a foreign-currency account be reconciled in riyals?
Reconcile it in its own currency first, against the ledger amounts in that currency. Exchange differences belong to the month-end revaluation, not to the reconciliation.
Does Naarvin connect directly to our bank?
Naarvin works from the statement files your banks provide, uploaded or delivered to a folder, alongside the ledger it reads from your ERP. It never moves money: payment files are prepared for a person to upload to the bank.