What Is Bank Reconciliation? The Complete Guide for 2026

What bank reconciliation actually is

Bank reconciliation is the process of checking that your accounting records match your bank statement. That's it. Everything else is commentary.

More specifically: you take the balance your bank says you have, you take the balance your own books say you have, and you work out why those two numbers are different. Then you either fix the difference or confirm that it's a timing issue that will sort itself out.

The two numbers are almost never identical on any given day. That's normal. Your books might show a payment you made yesterday, but the bank hasn't processed it yet. Or the bank has charged you a fee that you haven't recorded. The point of reconciliation is to account for every single one of those differences so you know, with certainty, how much money you actually have.

Think of it as a cross-reference. Your bank keeps its version of events. You keep yours. Bank reconciliation is where you sit them both down and make them agree.

If you've ever checked your bank balance online, noticed it didn't match what you expected, and then scrolled through recent transactions trying to figure out why - congratulations. You've done an informal bank reconciliation. The formal version is the same thing, just more thorough and with a paper trail.

Why it matters

If that sounds tedious, that's because it is. But so is checking your parachute before jumping out of a plane, and nobody questions the value of that.

Here's what happens when you don't reconcile:

Tax filings become unreliable. If your records don't match reality, your VAT returns or Self Assessment filings are built on sand. HMRC takes a dim view of that.

You lose track of who's paid you. Without reconciliation, it's easy to miss that a customer's payment bounced or that an invoice is still outstanding. You end up chasing money you've already received, or worse, not chasing money you haven't.

The step-by-step process

Here's how to do a bank reconciliation manually. Even if you use software, understanding the manual process is worth the five minutes, because it means you'll actually understand what the software is doing (and you'll know when it gets something wrong).

Common bank statement items to record

Worked example

Bank statement closing balance: £12,450.00. Cash book closing balance: £11,875.00. Difference: £575.00.

Both adjusted balances are £12,175.00. The reconciliation balances. If they don't match, something's been missed - go back through the bank statement and cash book.

Common reconciliation issues and how to resolve them

Timing differences

The most common reason for a mismatch, and the least alarming. You recorded something before the bank did, or vice versa. Outstanding cheques and deposits in transit are the classic examples. These aren't errors - they're just the natural lag between making a transaction and the bank processing it.

Watch out for items that stay on the "outstanding" list month after month. A cheque that's been outstanding for 90+ days probably isn't going to clear. Under UK law, cheques become stale after six months.

Transposition errors

You recorded £1,530 but the actual amount was £1,350. The digits got swapped. There's an old bookkeeping trick for spotting these: if the difference between your two balances is divisible by 9, there's a good chance a transposition error is the culprit. (£1,530 - £1,350 = £180. £180 ÷ 9 = 20. Bingo.)

Duplicates

The same transaction appears twice in your records. This happens more often than you'd think, especially when you're using bank feeds. Your software auto-imports a transaction AND you've already entered it manually. Now it's in there twice.

Bank errors

Rare, but they happen. The bank posts a transaction to the wrong account, processes a payment twice, or applies fees that shouldn't apply. Contact the bank. Get it in writing. Keep the correspondence with your reconciliation records.

Foreign currency transactions

If you receive or make payments in foreign currencies, the amount that actually hits your bank account depends on the exchange rate on the day of processing - not the rate on the day you raised the invoice. Record the actual amount received/paid, and post the difference to a foreign exchange gains/losses account.

How often should you reconcile?

Manual vs automated reconciliation

Manual reconciliation

Works fine for small businesses with straightforward banking. One bank account, under 50 transactions a month, no foreign currency - a manual reconciliation in a spreadsheet takes perhaps 30 minutes to an hour.

Pros: No software cost. You understand every transaction intimately. Full control.

Cons: Time-consuming as volume grows. Prone to human error (especially transposition mistakes). Doesn't scale - 500 transactions a month in a spreadsheet is miserable.

Automated reconciliation

Software imports your bank statement and matches transactions against your accounting records automatically, flagging anything it can't match for your review. Most modern accounting platforms (Xero, QuickBooks, Sage, FreeAgent) include some form of bank reconciliation. Dedicated tools like ReconcileIQ handle more complex scenarios - multiple file formats, fuzzy matching on descriptions, and tolerance for timing differences - which helps when your bank and your books describe the same transaction in completely different ways.

Pros: Dramatically faster (minutes instead of hours). Reduces human error. Makes daily reconciliation practical. Handles high volumes without breaking a sweat.

Cons: Requires some setup. Still needs human review of unmatched items. Costs money (though usually far less than the time it saves).

Bank reconciliation for different business types

Bank reconciliation is universal, but the specific challenges vary by industry.

E-commerce

E-commerce reconciliation is, frankly, a headache. The core problem: the amount a customer pays is not the amount that lands in your bank account. Between payment processor fees (Stripe takes 1.4% + 20p per transaction in the UK, for example), platform fees (Amazon, eBay, Etsy all take their cut), refunds, chargebacks, and settlement batches that lump hundreds of transactions into a single bank deposit - matching individual sales to bank entries is like solving a puzzle where someone's hidden half the pieces.

Restaurants and hospitality

Cash plus cards plus tips plus third-party delivery apps equals a reconciliation puzzle. Cash sales are recorded by the till but don't appear on the bank statement until deposited. Tips paid by card are included in the card settlement, but they belong to staff and need separating. Deliveroo, Uber Eats, and Just Eat all settle on their own schedules with their own fee structures.

Professional services

Generally simpler than retail, but with its own quirks. Client deposits received before work begins shouldn't be recorded as revenue until earned. Disbursements made on behalf of clients flow through your bank account but aren't your expenses. Large timing differences between invoicing and receipt are normal with net-30 or net-60 terms.

Landlords and property

Multiple properties through one bank account means tracking which income and expenses relate to which property. If you use a letting agent, they collect rent, deduct fees and maintenance costs, and send you the net amount. Your bank shows one deposit; the agent's statement shows gross rent, fees, and deductions. You need both to reconcile properly.

Common mistakes and how to avoid them

Not investigating old outstanding items. An outstanding cheque from three months ago isn't "just a timing difference" anymore. Something has gone wrong. Investigate anything outstanding for more than two months.

Ticking items off without checking amounts. It's tempting to match by description alone. "That £300-ish payment to British Gas looks about right." Don't do this. Check the exact amount. £312.47 vs £312.74 is a £0.27 difference that will cascade through everything.

Doing it all at year-end. The single most common mistake small businesses make. Reconciling twelve months in one sitting is soul-destroying, error-prone, and expensive if you're paying your accountant to do it. Monthly at minimum.

Adjusting the wrong side. When the bank charges a fee you haven't recorded, you adjust your cash book - NOT the bank statement balance. The bank statement is a fact. Your books are what need updating. The only time you adjust the bank side is for genuine timing differences or actual bank errors.

Ignoring small differences. "It's only £2.35 out - close enough." No. Reconciliation means the balances match exactly. A small unexplained difference might be a rounding issue you can track down in thirty seconds. Or it might be the visible tip of a larger error where two mistakes partially cancel each other out. Find it. Fix it.

Quick checklist

Use this for each reconciliation. Tick every item.

A process worth protecting

Bank reconciliation isn't glamorous. Nobody has ever called it exciting, and if they did, you'd be right to worry about them. But it's the single most effective routine check on the accuracy of your financial records.

A business that reconciles regularly knows where its money is. One that doesn't is guessing - and eventually, guessing catches up with you.

Whether you reconcile with a spreadsheet, your accounting software's built-in tools, or a dedicated reconciliation platform, the principle is identical: make the bank's numbers and your numbers agree, investigate every difference, and keep a record that proves you did.

Do it consistently, do it thoroughly, and month-end stops being something you dread.