Bank Reconciliation

By Nupur Mittal

Co-founder at OCTA — works with accounting firms on month-end close and reconciliation automation.

A bank reconciliation is the process of matching the cash balance in a company's general ledger to the balance on its bank statement, then explaining every difference. It confirms the cash figure in the books is accurate by accounting for timing items — outstanding checks and deposits in transit — and by catching bank charges, errors, and fraud. This page walks through the full process and format step by step, the red flags a careful reviewer watches for, and how accounting firms run reconciliations faster with OCTA Flow while a human approves every entry.

Why bank reconciliation matters, and where it goes wrong

Bank reconciliation is the most common recurring control in accounting — performed every period, for every bank and credit-card account, for every client. It exists because the balance in the books and the balance at the bank almost never match on any given day. Deposits are recorded before they clear, checks are written before they're cashed, and the bank posts fees and interest the business hasn't booked yet. Reconciliation forces every one of those differences to be identified and explained, which is what makes the cash number on the balance sheet trustworthy.

For a firm, the pain is volume and repetition. Matching hundreds of transactions line by line, chasing the one item that won't tie, and re-checking last month's outstanding checks is mechanical, low-judgment work — yet it has to be exactly right, because cash is the account clients and auditors scrutinize most. An unreconciled difference isn't just untidy; it can hide a duplicate payment, a bank error, a bounced customer check, or fraud. The goal is a clean, fully-explained reconciliation every period, with a documented trail — not a "close enough" that carries an unexplained difference forward.

The bank reconciliation process, step by step

A proper bank reconciliation follows a consistent sequence. The steps below are the full procedure OCTA Flow executes; they also stand alone as a best-practice process any firm can follow.

1. Set the starting balances. Take the ending balance per the bank statement and the ending cash balance per the general ledger for the same period-end date. These two figures are what you're reconciling to each other.

2. Match transactions. Compare each GL cash entry to the bank statement transactions on amount and approximate date (allow a few days for timing). Items that appear on both sides are matched and clear. Anything unmatched — on either side — is a reconciling item to explain.

3. Categorize the reconciling items. Sort every unmatched item into one of four buckets:

• Outstanding checks — checks recorded in the GL that haven't yet cleared the bank.
• Deposits in transit — deposits recorded in the GL that haven't yet appeared on the bank statement.
• Bank charges or credits not in the GL — fees, interest, NSF (returned) items, or wire transfers on the statement that the books haven't recorded yet.
• GL entries not on the bank statement — items in the books that shouldn't be there, which point to potential errors.

4. Carry forward prior outstanding items. Check whether last period's outstanding checks and deposits in transit have now cleared. Flag any check that has been outstanding for more than 90 days — a stale-check risk that may need to be voided and reissued.

5. Prepare the reconciliation. Adjust both sides to a common figure:

• Bank side: ending balance per bank + deposits in transit − outstanding checks = adjusted bank balance
• Book side: ending balance per GL + bank credits not recorded − bank charges not recorded = adjusted book balance

The adjusted bank balance should equal the adjusted book balance. Any remaining gap is an unexplained difference that must be investigated, not carried forward.

6. Verify against the official statement. Confirm the ending balance, account number, and statement period on the source data match the official bank statement — so the reconciliation is tied to a verified document, not just a spreadsheet export.

7. Propose adjusting entries. For every bank charge or credit not yet in the books, prepare the adjusting journal entry (for example, Dr Bank Charges / Cr Cash for a fee) for a person to review and post. The reconciliation isn't done until these are recorded or approved.

The bank reconciliation format (worked example)

The classic two-sided format brings the bank and the books to the same number. Here's a worked example for an operating account at March month-end:

Both sides tie to $60,865, so the account is reconciled. The $85 service charge becomes an adjusting entry the firm posts to the books; the $5,200 deposit in transit and $4,800 outstanding check are timing items that will clear next period.

Key controls and red flags

The difference between matching transactions and a reliable reconciliation is what you watch for. A careful reviewer flags:

• An adjusted bank balance that doesn't equal the adjusted book balance — an unexplained difference, the most serious flag
• Outstanding checks older than 90 days — stale-check risk; may need to be voided and reissued
• Large deposits in transit that don't clear the following period — possible error or misposting
• NSF (returned) checks — a customer's payment bounced, signaling credit risk
• Bank fees materially higher than the prior period — worth questioning
• Manual or wire transfers near period-end with no clear business purpose
• Duplicate transaction amounts on the same date — possible double payment

Catching these consistently, every account and every period, is what turns reconciliation from a tick-box exercise into a genuine control.

What a completed reconciliation produces

A finished reconciliation isn't just a matched spreadsheet — it's a documented workpaper a reviewer can sign off on and an auditor can follow. A complete bank reconciliation package includes:

How OCTA Flow automates bank reconciliation

OCTA Flow does the mechanical matching for you and leaves the judgment — and the sign-off — with your team. The workflow mirrors the process above:

1. Pick the Bank Reconciliation Skill. Flow already knows the full procedure: match transactions, categorize timing items, carry forward prior outstanding items, build the two-sided schedule, and flag exceptions.
2. Connect your data. Point Flow at the accounting system and bank feed, or upload the period's files — the GL cash account detail, the bank statement data, and the official bank statement.
3. Run. Flow matches every transaction it can, sorts the reconciling items into outstanding checks, deposits in transit, and unrecorded bank items, and builds the reconciliation schedule.
4. Review findings by severity. Instead of a wall of matched lines, Flow surfaces only the exceptions — ranked by severity, each with a plain-English explanation and a recommended action: post the adjusting entry, email the payee about a stale check, escalate an unexplained difference, or monitor an item into next period. Your team works the exceptions, not every line.
5. Sign off. Once the reconciliation ties and the entries are approved, Flow assembles the workpaper with the full audit trail intact.

The result: the repetitive matching is done in a fraction of the time, and your people spend their hours on the handful of items that actually need judgment.

Control and trust: Flow proposes, you approve

This is what matters most to a firm putting its name on the numbers: OCTA Flow never writes to your books on its own. Every adjusting entry and correction is a proposal that a human reviews and confirms before anything is posted. Flow does the matching and shows its reasoning; a person makes the call.

That control model runs through the whole reconciliation:

• Findings, not silent changes. Flow raises what it found and what it recommends — you decide.
• Severity and escalation built in. An unexplained difference is flagged as critical and can be escalated to a manager or partner rather than quietly buried.
• A complete audit trail. Every match, proposed entry, approval, and override is logged, so the reconciliation is fully traceable end to end.

You get the speed of automation with the accountability of human sign-off — exactly what a control account like cash requires.

What the reconciliation draws on

To run a bank reconciliation, Flow uses the same sources a preparer already works from:

• GL cash account detail — the general-ledger cash entries for the period (required)
• Bank statement data — the bank's transactions for the same period (required)
• The official bank statement — for verifying the ending balance, account number, and period (required)
• Prior-period reconciliation — to carry forward and clear last period's outstanding items (optional)

Flow works from whatever your client has connected — it matches each input by its purpose, so it doesn't matter what the files are named or which bank or system they came from.

Related skills and terms

Frequently Asked Questions

How do you do a bank reconciliation? Set the ending balances per the bank and the books, match transactions between them, categorize what doesn't match (outstanding checks, deposits in transit, unrecorded bank items), adjust both sides to a common figure, and post entries for anything the books are missing. The adjusted bank balance should equal the adjusted book balance.

What are outstanding checks and deposits in transit? Outstanding checks are payments you've recorded in the books but the bank hasn't cleared yet. Deposits in transit are deposits you've recorded but that haven't yet shown up on the bank statement. Both are timing differences, not errors, and usually clear the following period.

What causes a bank reconciliation to not balance? Common causes are an unrecorded bank fee or interest, a transposed or duplicated amount, a check or deposit posted for the wrong amount, a returned (NSF) check, or a transaction recorded in the wrong account. Any gap between the adjusted bank and book balances must be investigated, not carried forward.

How often should you reconcile bank accounts? At least monthly, as part of the close. High-volume accounts are often reconciled weekly or even daily so differences surface quickly.

What is a stale check? A check that has been outstanding for a long time — commonly flagged after 90 days and often considered stale after six months — and may need to be voided and reissued. Long-outstanding checks are a red flag in any reconciliation.

Can bank reconciliation be automated? The matching, categorization, and exception-flagging can be automated and reviewed, while judgment calls stay with your team. That's the model OCTA Flow uses.

Does OCTA Flow post entries directly to my accounting system? No. Flow proposes every adjusting entry; a person on your team reviews and approves before anything is posted to the books. Nothing is written automatically.

See how firms run faster, fully-explained reconciliations with human sign-off → start a 30-day OCTA Flow trial.