Bank reconciliation explained

A bank reconciliation compares the balance in the business’s own cash book with the balance on the bank statement at the same date and explains every difference between them. Differences are either timing items, such as payments not yet cleared, or items missing or wrong in the books, which must be corrected. No law prescribes the form, but it is the standard way to show that the cash records are complete and accurate.

What is a bank reconciliation?

The cash book (or the bank account in the nominal ledger) records every receipt and payment the business makes, on the date the business makes it. The bank statement records the same transactions on the date the bank processes them, plus items the bank initiates itself, such as charges and interest. The two balances rarely agree on any given day. A reconciliation lists the reasons, adjusts the books for anything genuinely missing, and proves that what is left is explained by timing alone.

The same exercise applies to every account that has an external statement: savings accounts, credit cards, loan accounts, payment processors and online marketplaces that hold funds before paying out.

Why do the cash book and the bank statement differ?

Timing differences (no correction needed in the books)

• Unpresented payments: cheques written or payments recorded in the books that have not yet cleared the bank.
• Outstanding lodgements: money paid in and recorded in the books that the bank has not yet credited.

Items missing or wrong in the books (correct the cash book)

• Bank charges and interest that only appear when the statement arrives.
• Direct debits, standing orders and card payments that were never posted.
• Customer receipts paid straight into the account and not yet matched to an invoice.
• Dishonoured cheques or reversed card payments.
• Posting errors, such as transposed figures or a payment posted to the wrong bank account.

Occasionally the error is the bank’s, in which case it is raised with the bank and shown on the reconciliation until corrected.

How do you prepare a bank reconciliation step by step?

1. Choose a date, usually a month end, and obtain the bank statement balance at that date.
2. Tick each item on the statement against the cash book for the period, and clear any timing items carried forward from the last reconciliation.
3. Post to the cash book every valid item on the statement that is not in the books, such as charges, interest and direct debits.
4. Correct any errors found in the books.
5. Calculate the adjusted cash book balance.
6. Take the statement balance, add outstanding lodgements and deduct unpresented payments.
7. Confirm the two figures agree. If they do not, the difference is unexplained and must be investigated, not written off.
8. File the reconciliation with the date, who prepared it and who reviewed it.

What does a worked example look like?

Illustration only. At 31 March 2027 a company’s cash book shows £5,420 in the bank and the bank statement shows £4,950. On review: bank charges of £30 and a direct debit of £250 are not in the books; interest of £20 received is not in the books; a supplier payment of £1,200 has not cleared; and takings of £1,410 paid in on 31 March are not on the statement.

Adjusted cash book	£	Bank statement	£
Balance per cash book	5,420	Balance per statement	4,950
Less bank charges	(30)	Add outstanding lodgement	1,410
Less direct debit	(250)	Less unpresented payment	(1,200)
Add interest received	20
Adjusted balance	5,160	Reconciled balance	5,160

The £5,160 is the figure for cash at bank in the balance sheet and on the trial balance. The two timing items should clear on the April statement; if the £1,200 payment is still uncleared months later, someone needs to find out why.

What do the law and HMRC require?

Section 386 of the Companies Act 2006 requires every company to keep adequate accounting records, sufficient to show and explain its transactions and to disclose with reasonable accuracy, at any time, its financial position. Those records must contain entries from day to day of all sums of money received and expended. Under section 387, failing to keep them is an offence committed by every officer in default. Section 388 requires a private company to preserve them for three years, and a public company for six years, from the date they are made.

Tax rules are longer. GOV.UK guidance says a company must keep records for 6 years from the end of the last company financial year they relate to, that supporting documents include bank statements, and that HMRC can charge a penalty of £3,000 for not keeping accounting records. Self employed people must keep records for at least 5 years after the 31 January submission deadline of the relevant tax year, and those using traditional accounting must keep a record of year end bank balances.

A reconciliation is the evidence that those records are complete. Where a bank account carries both business and personal spending, the reconciliation is also where items for a director’s loan account are identified. GOV.UK notes that HMRC may check your records to make sure you are paying the right amount of tax, and in a compliance check unexplained credits on a bank statement are an obvious line of questioning.

How often should a business reconcile its bank accounts?

For most businesses monthly is sensible, and at the very least before each VAT return so that the return is built on complete figures; see Making Tax Digital for VAT. Busy accounts with many card receipts are often reconciled daily or weekly through bank feeds.

Accountancy practices that hold client money face a specific rule. ICAEW’s Clients’ Money Regulations require reconciliation of client money bank accounts at least once every five weeks, with any differences rectified immediately unless they arise from timing. Records of those reconciliations must be held for at least six years and be available for inspection by ICAEW.

What mistakes come up most often?

• Forcing it to balance. Posting an unexplained difference to sundries or a suspense account hides the problem. Unexplained differences can mean missing income, duplicated payments or fraud.
• Reconciling to the bank feed rather than the statement. Feeds can drop or duplicate transactions. The statement is the independent evidence.
• Stale timing items. Uncleared cheques that are many months old are rarely timing differences. They may need writing back or chasing.
• Matching receipts to the wrong invoices. The bank balance can agree while the sales ledger is wrong, which later surfaces as false debts or missed bad debts.
• Only reconciling at the year end. Twelve months of differences take far longer to unpick than one.
• Ignoring other accounts. Credit cards, loans and payment platforms need reconciling too.

Once the bank is reconciled, the year end adjustments for accruals and prepayments can be made with confidence that the cash figures underneath them are right.

Solar Protect provides tax investigation insurance for businesses and fee protection schemes for accountancy practices. Read how our cover works or get a quote.

Related Accountapedia entries

• Business credit card reconciliation
• The cash book explained
• The month end close for small businesses
• Reconciling supplier statements
• Sales and purchase ledger control accounts

Sources

• legislation.gov.uk: Act 2006 c. 46, section 386
• legislation.gov.uk: Act 2006 c. 46, section 387
• legislation.gov.uk: Act 2006 c. 46, section 388
• GOV.UK: Company and accounting records
• GOV.UK: How long to keep your records
• GOV.UK: What records to keep
• ICAEW: Clients money regulations

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.