How to Prepare Your First Bank Reconciliation: A Step-by-Step Guide

For any new business owner or aspiring bookkeeper, the term “bank reconciliation” can sound intimidating. But what if I told you it’s one of the most powerful, fundamental financial health checks you can perform for your business? In my 15 years as a small business consultant, I’ve seen firsthand that mastering this simple monthly process is a non-negotiable key to managing cash flow, preventing fraud, and maintaining accurate financial records.

This guide will demystify the process completely. We’ll walk through it step-by-step, define all the key terms, and show you exactly what the final report should look like. Let’s get started.

First, What is a Bank Reconciliation?

A bank reconciliation is the process of comparing the cash balance on a company’s balance sheet (your internal records, or “cash book”) to the corresponding amount on its bank statement. The goal is to account for any differences between these two numbers and to ensure both are accurate and complete. Think of it as a professional version of balancing your personal checkbook.

Key Terms to Understand

Before we dive in, let’s clarify the jargon. Understanding these terms is half the battle.

Book Balance

The cash balance according to your company’s internal records (your cash book).

Bank Balance

The cash balance according to the bank statement.

Deposits in Transit

Checks and cash you have received and recorded in your cash book, but which have not yet been processed by the bank by the end of the period.

Outstanding Checks

Checks you have written and recorded in your cash book, but which have not yet been cashed by the recipient and cleared your bank account.

Bank Service Charges

Fees charged by the bank for its services (e.g., monthly maintenance fees). These appear on the bank statement.

Interest Earned

Interest paid by the bank to you on your account balance. This also appears on the bank statement.

NSF (Non-Sufficient Funds) Check

A check from a customer that you deposited, but which “bounced” because the customer didn’t have enough money in their account to cover it.

The Step-by-Step Bank Reconciliation Process

1. Compare Deposits

   Place your bank statement and your cash book side-by-side. Go through each deposit listed on your bank statement and tick it off against the corresponding entry in your cash book. Any deposits in your cash book that are NOT on the bank statement are your Deposits in Transit. Make a list of these.

   Example: Your cash book shows you deposited $500 on July 31st, but your bank statement (which also ends July 31st) doesn’t show it yet. This $500 is a Deposit in Transit.

2. Compare Withdrawals (Checks & Debits)

   Do the same thing for withdrawals. Go through each check, debit card transaction, and bank transfer on your bank statement and tick it off against your cash book records. Any checks you’ve recorded in your cash book that have NOT appeared on the bank statement are your Outstanding Checks. List them out, including the check number and amount.

   Example: On July 28th, you wrote Check #1255 for $200 to a supplier. You recorded it in your cash book, but as of July 31st, the supplier hasn’t cashed it. This $200 is an Outstanding Check.

3. Note Bank-Side Transactions

   Now, look carefully at the bank statement for any items you don’t have in your cash book. These are typically things the bank knows about before you do. Common examples include:

   • Bank service charges
   • Interest earned
   • Direct deposits from clients you weren’t aware of
   • NSF checks from customers that were returned

   You need to record these items in your cash book to update it.

4. Adjust Your Cash Book Balance

   This is a critical step. You must make journal entries (or simple entries in your spreadsheet) for all the items you found in Step 3. Add any interest earned or unknown deposits. Subtract any bank fees or NSF checks. After making these entries, you will have a new, correct balance in your cash book. This is your Adjusted Book Balance.

5. Prepare the Final Reconciliation Statement

   Now you create the formal report. The report has two sections that must arrive at the same final number. It’s structured like this:

   Bank Side: Start with the closing balance from the bank statement. Add all your Deposits in Transit. Subtract all your Outstanding Checks. The result is the Adjusted Bank Balance.

   Book Side: The work here is already done! The balance for this side is simply the Adjusted Book Balance you calculated in Step 4.

6. Verify: The Balances Must Match!

   If your Adjusted Bank Balance (from the Bank Side calculation) equals your Adjusted Book Balance, you have successfully reconciled your account! The two numbers should be identical. If they’re not, it means there’s an error somewhere that needs to be found (see our FAQ below).

Sample Bank Reconciliation Statement

Here’s what a completed statement looks like, using some example figures for a fictional company as of July 31, 2025.

ABC Company Inc. Bank Reconciliation Statement As of July 31, 2025
Bank Side Reconciliation
Cash Balance per Bank Statement	$5,250.00
Add: Deposits in Transit	$500.00
Less: Outstanding Checks
Check #1255	($200.00)
Check #1257	($150.00)
Adjusted Bank Balance	$5,400.00
Book Side Reconciliation
Cash Balance per Books (before adjustments)	$5,465.00
Add: Interest Earned	$5.00
Less: Bank Service Charge	($20.00)
Less: NSF Check Returned	($50.00)
Adjusted Book Balance	$5,400.00