What Reconciled Actually Means for a Bank Account
A bank account that agrees to the statement is not necessarily reconciled, and the difference is the part that matters at year end.
Most bank reconciliations at this size prove exactly one thing: that a number was typed correctly. The software shows a difference of nil, somebody clicks the button that says reconciled, and the account is treated as settled for the month.
A difference of nil is where the work starts. It says the two sides agree once you accept the list of items sitting between them, and the list is the part nobody looks at. A reconciliation is worth something when it asserts four things at once, and only one of them is arithmetic.
- The ledger balance ties to the statement balance through a stated list of items.
- Every item on that list is a real transaction with a document behind it.
- Every item on that list is expected to clear, and the ones that have not cleared have a reason and a person against them.
- Somebody other than the preparer read it and said so, in a way that can be pointed at later.
Assertions two and three are the ones that get skipped, and they are the ones that matter when the year end file lands or when a lender starts asking about the cash line. This is the standard every bank and card account is held to on a close we run, and it is the first thing we rebuild on a file where the close has stopped being reliable.
The account, and the figures
What follows walks one operating bank account through one month, from the statement to the sign-off.
Every figure and date below is invented, and deliberately round, so the shape of the exercise is easy to read. There is no real company here, no real bank and no real balance. The month is described as “month seven” rather than by name, because the exercise is the same in any month.
Step one: the statement, and only the statement
Take the bank’s own statement for the period, as a document, from the bank. Not the online balance, which is a moving number that includes things the statement does not and excludes things it does. Not an export from the accounting software’s bank feed, which is a copy of the bank’s data filtered by whatever the feed decided to send.
This sounds pedantic until the month a feed drops three days of transactions silently and the reconciliation is performed against the feed. The difference is nil, because both sides are missing the same three days.
For this account, the statement for month seven closes at 412,000.
Step two: the tie
The reconciliation is a bridge with a fixed shape, and the shape does not change from month to month.
| Line | Amount |
|---|---|
| Closing balance per bank statement | 412,000 |
| Add: deposits recorded in the ledger, not yet on the statement | 38,000 |
| Less: cheques and payments issued, not yet presented | (61,000) |
| Add or less: items on the statement not yet in the ledger | Nil |
| Balance per general ledger | 389,000 |
The fourth line is the one to look at hardest, and in a healthy month it is nil. Items on the statement that are not in the ledger are not reconciling items at all. They are unposted transactions, and the correct treatment is to post them, not to list them. Bank charges, interest, a direct debit nobody knew about, a returned deposit: each of those is a real transaction the ledger has not been told about. A reconciliation that carries them as bridging items is a reconciliation being used to avoid doing the bookkeeping.
Then the line that is not on the bridge at all, and never should be: the plug. A residual difference cleared to bank charges because it is small. That entry removes the evidence of what went wrong while leaving the error in place, and it teaches the file that differences are absorbable. If a difference genuinely cannot be identified after the work is done, it is written off with the amount and the reason stated on the reconciliation itself, and it is reported to the reviewer rather than buried in an expense line.
Last on the tie: the ledger balance on the bridge has to equal the trial balance figure for that account at the lock date. Not approximately. This sounds too obvious to check and it is among the most common defects found in a new file, because a reconciliation prepared before the last few entries were posted will tie to a ledger balance that no longer exists.
Step three: the outstanding items listing, which is the actual document
The bridge above is five lines. The listing behind it is the reconciliation.
| Item | Type | Date issued or recorded | Amount | Status |
|---|---|---|---|---|
| Cheque 1042, supplier | Outstanding cheque | Month 7, day 26 | 22,000 | Ordinary. Issued four business days before period end |
| Cheque 1044, supplier | Outstanding cheque | Month 7, day 28 | 9,000 | Ordinary |
| Cheque 1019, contractor | Outstanding cheque | Month 4, day 12 | 25,000 | Aged. Three closes old. Owner assigned, see below |
| Cheque 1031, refund to a customer | Outstanding cheque | Month 6, day 9 | 5,000 | Aged. Two closes old |
| Customer deposit, month 7 day 31 | Deposit in transit | Month 7, day 31 | 30,000 | Ordinary. Received on the last business day |
| Card terminal settlement, month 7 day 30 | Deposit in transit | Month 7, day 30 | 8,000 | Ordinary, and cleared on day 2 of month 8 |
Two things about this listing.
Every item has a date, and the date is the date the item was issued or recorded, not the date it was noticed. A listing where every item is dated the last day of the month is a listing that has been rebuilt from a difference rather than carried forward from the ledger.
And every item has to be findable in the ledger. The test is not that the amounts add up. It is that you can click each line and land on a real entry with a real payee and a real supporting document. An outstanding cheque with no payee on it is not a timing difference, it is an unexplained credit to the bank account.
Step four: the ageing test, which is where a reconciliation becomes useful
An outstanding item is a timing difference for a short period. After that it is something else, and the change happens quietly.
The rule to apply, and it takes about two minutes a month:
One close old. Ordinary. No action.
Two closes old. A question. Somebody contacts the payee. Deposits in transit almost never reach this state, and one that does is not a deposit in transit; it is a missing deposit, a processor holdback or a receipt that was recorded but never banked, and all three are worth finding out about the same day.
Three closes old or more. A defect, not a balance. It goes on the reconciliation with a name and a date against it, and it stays visible until it is resolved. Cheque 1019 above is in this state.
The resolution for a genuinely stale cheque is not to remove it from the listing. A cheque that has been outstanding long enough that the bank would refuse to honour it has not stopped being an amount you owe somebody. It gets voided in the ledger and the liability is reinstated as a payable to that supplier, with a note of why, and then somebody actually contacts them. Writing it back to income because it has gone quiet is how a company ends up holding other people’s money in its revenue line, and it is one of the things an outside reader looks for specifically.
The pattern to watch across months is not the individual item, it is the count. An account carrying the same two aged items for six months has a reconciliation that is being performed and not read.
Step five: the reviewer, and what a sign-off actually asserts
A reviewer who initials the bottom of a reconciliation without doing the following has added a signature and no assurance.
The reviewer checks:
- The statement in the file is the bank’s own document, and the closing balance on the bridge was read off it.
- The ledger balance on the bridge equals the trial balance for that account at the lock date.
- Every outstanding item has a date, an amount and a payee or source.
- Nothing sits on the fourth line of the bridge.
- The aged items each carry a name and a date, and the names are not all the preparer’s.
- The count of aged items has not grown since last month, and where it has, there is a sentence explaining why.
- No difference has been cleared to an expense account.
That is a five minute review for a clean account, and it is the entire reason the reconciliation means anything. A reconciliation is a specific person asserting something. Without the second person, it is one person’s arithmetic checked by nobody, which is the condition the whole exercise was designed to remove.
File the statement, the bridge, the listing and the sign-off together in the month’s close binder, in the same place every month. A reconciliation that lives in the accounting software and nowhere else disappears the day the subscription lapses or the software vendor changes their export format.
The four failures worth naming
| Failure | What it looks like | Why it survives |
|---|---|---|
| Reconciling to the online balance | The bridge ties, and it ties to a number that changed while you were looking at it | It is faster, and it works most months |
| The plug to bank charges | A small entry, every month, in the same account | Nobody reviews a small entry in an account that is supposed to contain small entries |
| The rebuilt listing | Every outstanding item dated the last day of the month | The reconciliation ties, which is the only thing anybody checks |
| Auto-matched with an adjustment | The software offered to create an entry to make it balance, and someone accepted | The button is right there and it says the account is now reconciled |
The fourth one deserves a sentence of its own. Modern accounting software will offer to post an adjusting entry to force a reconciliation to balance. That feature exists for edge cases and it is used routinely as a shortcut, and it produces a file where the bank account reconciles every month and the general ledger contains a series of entries nobody can explain. If your ledger has an account holding those entries, its balance is the running total of everything the reconciliation process has failed to find.
What we do not do
We do not reconcile to a bank feed or to an online balance, and we do not accept a reconciliation performed against either.
We do not clear a residual difference to an expense account, at any size, and we do not accept a file where somebody else has.
We do not carry an unposted transaction as a reconciling item. It gets posted.
And we do not sign a reconciliation we prepared. In a company small enough that there is genuinely nobody else, the control gap is written down and named rather than papered over with a second initial from the same hand.
Why this standard, at this size
Because the bank account is the one balance in the company that an outsider can independently verify, which makes it the first thing anybody checks and the thing your file is judged on. A lender assessing a facility, an external accountant starting a year end, a buyer’s advisor in diligence: all of them start at cash, because cash is where a weak file shows up fastest and where a strong one buys credibility for everything else.
Twelve months of reconciliations with dated listings, aged items worked, and two names on each is a file that answers the cash question before it is asked. It also takes about the same amount of time each month as the version that proves nothing.