Key takeaways
- A bank reconciliation proves that the balance in your own records (the cash book) agrees with the balance on your bank statement at the same date.
- Items on the bank statement but missing from your records, such as bank charges, direct debits and BACS receipts, are corrected in the cash book.
- Timing differences are adjusted on the bank side: subtract unpresented cheques and add outstanding lodgements to the statement balance.
- The reconciliation is finished when the adjusted cash book balance equals the adjusted bank balance to the penny.
- A cheque paid in on a weekday before the bank's cut-off is usually cleared by 23:59 on the next weekday under Pay.UK's Image Clearing System.
- Limited companies must keep accounting records, including bank statements, for 6 years from the end of the financial year they relate to, and HMRC can fine a company £3,000 for not keeping them.
- Reconcile at least monthly, and always before a VAT return or year end, so errors are found while they are easy to trace.
A bank reconciliation checks that the balance in your own records agrees with the balance on your bank statement on the same date. You tick off matching items, correct your records for anything only the bank knows about, then adjust the bank balance for items still in transit. When the two adjusted balances match, your records are right.
What is a bank reconciliation?
It is a short working paper that explains the difference between two balances. One is your cash book balance: the bank column in your ledger, spreadsheet or software. The other is the bank statement balance at the same date.
The two rarely agree on the day, for two reasons:
- Things the bank knows that you do not yet: bank charges, interest, direct debits and customer payments you have not recorded.
- Things you know that the bank does not yet: cheques you have written that have not been presented, and money you have paid in that has not cleared.
The first group means your records need correcting. The second group is just timing.
How to do a bank reconciliation in six steps
Work through the steps in order. Each one shrinks the list of unexplained items.
- Pick the date and note both balances. Use the bank statement closing balance and the cash book balance at the same date.
- Tick off matching items. Go line by line. Tick each receipt and payment that appears in both the statement and the cash book, with the same amount.
- Clear last month’s open items. Tick any unpresented cheques or lodgements from the previous reconciliation that now appear on the statement.
- Update the cash book. Any unticked item on the statement is missing from your records. Enter bank charges, interest, direct debits, standing orders and receipts you had not recorded. Then recalculate the cash book balance.
- List the timing differences. Any unticked item left in the cash book is in transit. Payments are unpresented cheques; receipts are outstanding lodgements.
- Prove the balances agree. Start with the statement balance, subtract unpresented cheques and add outstanding lodgements. The answer should equal the updated cash book balance.
A common mistake is to get step 6 backwards. A cheque you have written has already left your cash book but not the bank, so you take it off the bank balance. Money you have paid in is already in your cash book but not the bank, so you add it on.
A worked example
Here is a reconciliation for a small business at 31 October 2026.
The cash book shows £4,250. The bank statement shows £4,880. After ticking, these items remain.
| Item | Where it appears | Action |
|---|---|---|
| Bank charges £15 | Statement only | Deduct in cash book |
| Insurance direct debit £85 | Statement only | Deduct in cash book |
| Customer BACS receipt £450 | Statement only | Add in cash book |
| Cheque 1042 to supplier £600 | Cash book only | Unpresented cheque |
| Takings paid in on 31 October £320 | Cash book only | Outstanding lodgement |
Updated cash book: £4,250 minus £15 minus £85 plus £450 = £4,600.
Adjusted bank balance: £4,880 minus £600 plus £320 = £4,600.
The two figures match, so the reconciliation is complete. Next month, look for cheque 1042 and the £320 lodgement on the November statement.
How long do items take to clear?
Most cheques now clear the next working day. Under Pay.UK’s Image Clearing System, a cheque paid in on a weekday before the bank’s cut-off can usually be withdrawn by 23:59 on the next weekday. Paying in at a Post Office adds at least one more day.
So a lodgement still open after a week is worth chasing.
What if the balances do not agree?
A difference means something is missing, duplicated or wrong. Check these in order:
- Transposed figures. If the difference divides exactly by 9, two digits are probably swapped, such as £540 entered as £450.
- Half the difference. An item entered on the wrong side moves the balance by twice its value.
- Opening balance. Make sure this month’s opening figures agree with last month’s reconciled closing figures.
- Duplicates. Look for the same payment entered twice, often after an import from the bank feed.
- Wrong date. An item dated just after the period end may have slipped into the cash book.
Why reconciling matters for tax
Clean bank records support every return you file. GOV.UK says a limited company must keep accounting records, including bank statements, for 6 years from the end of the financial year they relate to. HMRC can fine a company £3,000 for not keeping them.
Sole traders must keep records for at least 5 years after the 31 January filing deadline for the tax year. HMRC’s VAT Notice 700/21 asks VAT-registered businesses to keep VAT records for at least 6 years. Reconcile before each VAT return so the figures you submit are complete.
What to do now
- Set a monthly date, such as the fifth working day after month end.
- Keep each reconciliation with the statement it relates to.
- Move to software once volumes grow; most packages match bank feeds automatically, though you still review the matches.
- Ask for help if old differences keep rolling forward. See what bookkeeping involves and what a bookkeeper costs.
For context on where the cash figure ends up, read how to read a balance sheet and what cash flow is.
Frequently asked questions
How often should I do a bank reconciliation?
At least once a month, and always before a VAT return or year-end accounts. Busy businesses often reconcile weekly.
Do I add or subtract unpresented cheques?
Subtract them from the bank statement balance. The money has left your cash book but has not yet left the bank account.
What is an outstanding lodgement?
It is money you have paid in and recorded in your cash book that has not yet appeared on the bank statement. Add it to the bank statement balance.
How long must I keep bank statements?
A limited company must keep them for 6 years from the end of the financial year they relate to. Sole traders must keep records for at least 5 years after the 31 January filing deadline.
Sources
Rates, thresholds and rules in this guide were checked against HMRC and GOV.UK guidance on 6 November 2026. Tax rules change, so check the current position on GOV.UK or with a qualified adviser before acting. This guide is general information, not personal advice.