Learn · Reconciliation
Accounting reconciliation: how businesses match records and catch errors
Learn accounting reconciliation, the manual bank-reconciliation process, common discrepancies, review controls, and how remittance data improves matching.
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In short
What is accounting reconciliation?
Accounting reconciliation compares two records that should describe the same balance or activity, explains every difference, records necessary corrections, and leaves dated evidence of review. In a bank reconciliation, finance ties the bank statement to the cash ledger while separating timing items from missing, duplicated, misclassified, unauthorized, or bank-originated transactions.
What a bank reconciliation actually proves
The US Trustee handbook describes a bank reconciliation as identifying the bank-statement balance and accounting-record balance at month end and explaining differences such as deposits or transfers in transit, outstanding checks, returned checks, service charges, and errors. That definition is more useful than “make the numbers match” because different items demand different actions.
Timing difference or accounting exception?
| Feature | Timing itemBoth records can be right | Book adjustmentLedger lacks bank activity | InvestigationSource or legitimacy unclear |
|---|---|---|---|
| Example | Deposit recorded before bank credit | Bank fee not yet posted in ledger | Unknown debit or duplicate payment |
| Immediate action | List with date and trace next statement | Record supported journal entry | Identify, contain, and escalate |
| Evidence | Deposit or payment record plus later clearance | Statement line, agreement, calculation, approval | Bank inquiry, payment file, system log, owner decision |
| Close treatment | Carry only while genuinely outstanding | Adjust books in correct period | Do not hide in a generic reconciling line |
Washington State Auditor guidance separates timing differences, bank activity missing from accounting records, and accounting activity that is not a bank receipt or deposit.
Manual bank reconciliation, step by step
Use a fixed statement end date and retain the files that support every line.
Lock the population
Identify the legal entity, bank account, currency, statement period, statement version, and matching general-ledger account. Confirm the opening balance agrees with the prior approved reconciliation.
Tie closing balances to source
Trace the statement ending balance to the bank document and the book balance to the general ledger. Do not begin with an exported spreadsheet whose total cannot be reproduced.
Match period activity
Match deposits, payments, transfers, interest, fees, reversals, and returns by stable identifier where possible. Confirm amount, currency, date, counterparty, and status rather than amount alone.
Classify differences
Separate genuine timing items from missing book entries, bank errors, duplicates, wrong accounts, unauthorized activity, and items whose source is unknown.
Record supported adjustments
Post bank fees, interest, returns, FX differences, and corrections with source evidence and approval. Never journal directly to “reconciliation difference” merely to force equality.
Recalculate the bridge
Adjusted book and bank positions should agree after supported items. The Utah State Auditor expresses completion as adjusted accounting balance equaling bank balance less outstanding payments plus outstanding deposits.
Review carried items
Compare every outstanding item to the prior period, locate later clearance, and assign old or unusual entries to an owner. A carried amount should retain its original identity and date.
Approve and archive
A reviewer checks dates, sources, arithmetic, adjustments, old items, and unusual activity, then signs and dates the reconciliation. Preserve the statement, ledger detail, matching output, support, journals, and review evidence.
Common reasons the bank and books differ
| Difference | Evidence to inspect | Typical resolution |
|---|---|---|
| Deposit in transit | Deposit record and later statement | Carry, then clear when credited |
| Outstanding payment | Approved payment and later settlement | Carry, cancel, reissue, or investigate |
| Bank fee or interest | Statement and account agreement | Post supported book entry |
| Returned receipt | Return code, original receipt, customer account | Reverse cash and reopen collection as appropriate |
| Duplicate or wrong amount | Invoice, payment batch, authorization, bank trace | Recover or correct and strengthen control |
| FX or intermediary deduction | Payment message, conversion, charge detail, expected invoice | Post or dispute under agreed terms |
| Unknown transaction | Bank inquiry, users, credentials, system log | Escalate immediately; do not age silently |
| Wrong ledger account | Bank line, journal, entity and currency mapping | Reclassify with documented approval |
Age alone does not resolve an exception. US State Department procedures require research into outstanding unmatched items and documentation of requests needed to clear them. A private business can use the same discipline: retain the original date, stop repeated rebooking, and escalate unknown cash or payments before the evidence becomes harder to recover.
Other reconciliations use the same logic
| Reconciliation | Record A | Record B |
|---|---|---|
| Accounts receivable | Customer and invoice subledger | General ledger and settled receipts |
| Accounts payable | Supplier and invoice subledger | General ledger, statements, and payments |
| Payroll | Payroll register and liabilities | Ledger, bank, filings, and remittances |
| Tax | Tax calculation and return | Ledger liability and payment evidence |
| Intercompany | One entity’s due-to balance | Counterparty entity’s due-from balance |
| Fixed assets | Asset register | General ledger cost and accumulated depreciation |
| Payment processor | Gross orders, refunds, and fees | Net settlement and bank receipt |
The IRS describes journals as transaction records and ledgers as account-level summaries. Reconciliation tests whether the detail, summary, and external evidence remain connected.
Why remittance information changes reconciliation
Remittance information tells the recipient what a payment is intended to settle. Swift’s ISO 20022 handbook explains that a structured creditor reference, such as an invoice number, can be extracted from account reporting to facilitate straight-through processing and auto-matching. Swift’s corporate guidance says structured remittance information can accelerate reconciliation. The benefit exists only when the reference survives the payment chain and maps to a real open item.
- Put a stable invoice or customer reference in the designated remittance field, not only in an email.
- For one payment covering many invoices, send a machine-readable allocation or remittance advice that totals to the transfer.
- Preserve end-to-end and bank references separately from the commercial invoice reference.
- Do not auto-match only on amount when multiple customers make common round-number payments.
- Store gross invoice amount, credits, withholding, fee, FX conversion, and net settlement as distinct fields.
- Measure why auto-match failed so billing instructions and payment data can be improved at source.
Cross-border receipts can add exception dimensions. Correspondent banking can involve multiple institutions and charges, while currency conversion can make the credited amount differ from the invoice currency. When receipts lack usable invoice references, finance must search other records to identify the open item. Reconcile the commercial obligation, payment message, FX, charges, and final bank credit as separate layers.
Accounting-reconciliation questions
What is the purpose of a bank reconciliation?
To connect the bank statement and cash ledger at a common date, explain every difference, post supported corrections, and preserve evidence that another person can review.
What are deposits in transit?
Receipts already recorded in the books that have not yet appeared as credited on the statement date. They should be listed individually and traced to later bank activity rather than carried indefinitely.
What are outstanding checks or payments?
Payments recorded in the books that have not yet cleared the bank at the statement date. Confirm whether they later settle, need cancellation or reissue, or indicate an error.
Does a zero reconciliation difference prove there was no fraud?
No. It shows the arithmetic bridge balances. Proper review still tests authorization, classification, counterparties, duplicates, unusual activity, and whether two errors offset.
How should bank fees and returned payments be handled?
Use the statement, agreement, return detail, and original transaction to post the appropriate supported entry. Reopen the customer or supplier item when settlement failed rather than leaving cash overstated.
Why can’t an incoming amount always be matched to an invoice?
The payer may combine invoices, deduct credits or withholding, pay in another currency, omit the invoice number, use a third-party sender, or lose the reference through the payment chain. Structured remittance reduces, but does not eliminate, these exceptions.
Who should review a reconciliation?
Someone with sufficient knowledge and independence from preparation to check source balances, reconciling items, adjustments, aging, unusual transactions, and evidence. Team size determines the exact segregation and compensating review.
Sources
External links open in a new tab.
- Chapter 7 Trustee bank account reconciliation procedures — US Department of Justice
- Bank reconciliations — Office of the Washington State Auditor
- Bank reconciliation checklist — Utah Office of the State Auditor
- Examination techniques, bank reconciliation — Internal Revenue Service
- Reconciling US Government bank accounts — US Department of State
- ISO 20022 Programme User Handbook — Swift
- ISO 20022 for corporates — Swift
- How should I record my business transactions? — Internal Revenue Service
- About ISO 20022 — Swift
- The future of correspondent banking: cross-border payments — Swift Institute
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