Why the two balances differ
The bank and your books record the same transactions, but not at the same time and not always with the same information. Every difference falls into one of two groups:
- The books know it, the bank does not yet. Deposits in transit and outstanding checks. These are timing differences, and they adjust the bank side.
- The bank knows it, the books do not yet. Bank charges, interest, direct debits, customer checks returned unpaid, and errors in your own records. These adjust the book side and need journal entries.
Errors made by the bank are rare but possible. They go on the bank side and you ask the bank to correct them.
Step 1: adjust the bank balance
Start with the balance per bank statement, $18,452.30. Add deposits in transit: the $3,615.00 paid in on the last afternoon of September is in the books but reaches the bank statement only in October. Subtract outstanding checks: checks #2207, #2211 and #2214, $4,415.75 in total, were written and recorded but have not yet been cashed by the payees.
Adjusted bank balance = 18,452.30 + 3,615.00 − 4,415.75 = 17,651.55
To find the items, tick off every deposit and every check in the cash account against the statement. Whatever is in the books but not on the statement is in transit or outstanding. Check last month's reconciliation too: an outstanding check from August that still has not cleared stays on the list.
Step 2: adjust the book balance
Start with the balance per books, $18,784.15, and work through the statement for items you have not recorded:
- Add interest earned, $12.40, credited by the bank.
- Subtract the bank service charge, $35.00.
- Subtract the NSF check, $480.00. A customer's check you deposited bounced, so the bank took the money back. The customer still owes it.
- Correct the book error. Check #2203 was written and cleared for $1,920.00 but entered in the books as $1,290.00. The books show $630.00 too much cash, so subtract the difference.
Adjusted book balance = 18,784.15 + 12.40 − 35.00 − 480.00 − 630.00 = 17,651.55
Step 3: prove that both sides agree
The adjusted bank balance and the adjusted book balance must be identical, here both $17,651.55, so the difference cell shows 0. That figure is the cash you report on the balance sheet. If the two do not agree, look for the classic causes before you force a plug:
- A difference divisible by 9 often points to a transposition, as with 1,290 and 1,920: the gap of 630 is 9 × 70.
- A difference equal to one item, or twice one item, suggests it was missed or entered with the wrong sign.
- An item from last month's list that cleared this month but was not taken off.
Worked example: Harbor Lane Studio, 30 September 2026
The top half adjusts the bank balance, the middle the book balance, and the bottom lists the journal entries for the book-side items. The business and its figures are fictional.
| A | B | C | D | Formula in D | |
|---|---|---|---|---|---|
| 1 | Harbor Lane Studio, bank reconciliation, 30 Sep 2026 | USD | |||
| 2 | Balance per bank statement | 18,452.30 | |||
| 3 | Add: deposit in transit (paid in on 30 Sep) | 3,615.00 | |||
| 4 | Less: outstanding checks | ||||
| 5 | Check #2207 | 1,240.00 | |||
| 6 | Check #2211 | 865.75 | |||
| 7 | Check #2214 | 2,310.00 | |||
| 8 | Adjusted bank balance | 17,651.55 | =D2+D3-SUM(D5:D7) | ||
| 9 | |||||
| 10 | Balance per books (Cash account) | 18,784.15 | |||
| 11 | Add: interest earned | 12.40 | |||
| 12 | Less: bank service charge | 35.00 | |||
| 13 | Less: NSF check from a customer, returned unpaid | 480.00 | |||
| 14 | Check #2203 as recorded in the books | 1,290.00 | |||
| 15 | Check #2203 as paid by the bank | 1,920.00 | |||
| 16 | Less: error on check #2203 | 630.00 | =D15-D14 | ||
| 17 | Adjusted book balance | 17,651.55 | =D10+D11-D12-D13-D16 | ||
| 18 | Difference (must be 0) | 0.00 | =D8-D17 | ||
| 19 | |||||
| 20 | Journal entry (30 Sep) | Debit | Credit | Amount | |
| 21 | Interest earned | Cash | Interest income | 12.40 | =D11 |
| 22 | Bank service charge | Bank charges | Cash | 35.00 | =D12 |
| 23 | NSF check | Accounts receivable | Cash | 480.00 | =D13 |
| 24 | Error on check #2203 | Accounts payable | Cash | 630.00 | =D16 |
| 25 | Cash after the entries | 17,651.55 | =D10+D21-D22-D23-D24 | ||
Only rows 21 to 24 become journal entries. The deposit in transit and the outstanding checks clear at the bank on their own.
Step 4: record the journal entries
Only the book-side items get journal entries, because only they change what you know about your cash:
- Interest: debit Cash, credit Interest income, $12.40.
- Bank charge: debit Bank charges (an expense), credit Cash, $35.00.
- NSF check: debit Accounts receivable, credit Cash, $480.00. The receivable is back, and you follow up with the customer. If the bank also charged a returned-check fee, record it like any other bank charge, and many businesses pass that fee on to the customer.
- Error on check #2203: debit Accounts payable, credit Cash, $630.00. The check paid a supplier invoice, so the supplier balance was reduced by too little.
After posting, the cash account shows $17,651.55, the same as the reconciliation. Deposits in transit and outstanding checks need no entry: they are already in the books and clear at the bank on their own in the next few days. The corrected cash balance then flows into the trial balance.
How often to reconcile, and who should do it
At least monthly, when the statement arrives, and as part of every month-end close. Businesses with many transactions reconcile weekly or even daily, which accounting software makes easy by matching bank feed lines to ledger entries. For internal control, the person who reconciles should not be the one who writes checks or records cash receipts. Old outstanding checks and unexplained differences are early signs of errors or fraud, so investigate them instead of carrying them forward month after month.
Common mistakes
- Adding outstanding checks instead of subtracting them. The bank still has the money the checks will take away. They reduce the bank balance.
- Putting items on the wrong side. Deposits in transit and outstanding checks adjust the bank balance. Charges, interest, NSF checks and book errors adjust the book balance.
- Booking entries for timing differences. Outstanding checks and deposits in transit are already recorded. An entry would count them twice.
- Forgetting last month's outstanding items. A check outstanding in August that has not cleared yet must stay on September's list.
- Treating an NSF check as a bank expense. The customer still owes the money, so it goes back to accounts receivable.
- Plugging the difference. An unexplained difference booked to a suspense or miscellaneous account hides errors. Find the cause first.
Frequently asked questions
What is a deposit in transit?
Money you have recorded as deposited but that the bank has not yet credited by the statement date, for example a deposit made on the last afternoon of the month. It is added to the bank balance on the reconciliation.
Do outstanding checks need a journal entry?
No. They were recorded when the checks were written. Only the bank has not processed them yet, so they are a timing difference that clears by itself.
Which items in a bank reconciliation need journal entries?
Only the book-side items: bank charges, interest earned, NSF checks, direct debits or credits you did not know about, and errors in your own records.
What is an NSF check in a bank reconciliation?
A customer's check that bounced because the account did not have sufficient funds. The bank removes the amount from your account, so you subtract it from the book balance and debit accounts receivable, because the customer still owes you.