What Is Bank Reconciliation?

Short answer

Bank reconciliation compares an organisation’s accounting records with bank records for the same account and period. The objective is not simply to make two totals equal: it is to explain every difference, record valid adjustments, and retain evidence that the final book balance is complete, accurate, and supported by the bank.

Bank reconciliation is the controlled comparison of transactions and balances in a company’s books with transactions and balances reported by its bank. For each bank account and period, the finance team identifies differences, determines why they exist, posts any necessary accounting entries, and documents the resulting agreement.

The bank statement and the ledger are two independent records of the same cash. They often differ temporarily. A customer payment may be visible at the bank before it is allocated to an invoice. A payment initiated on the last day of the month may be in the ledger but not yet settled. Bank charges may appear before accounting receives supporting detail. Reconciliation explains these differences; it should not conceal them with an unexplained balancing entry.

What a reconciliation should prove

A sound reconciliation supports four questions:

  1. Completeness: are all bank transactions for the period represented in the books or explicitly identified as timing items?
  2. Accuracy: are amounts, currencies, dates, accounts and counterparties recorded correctly?
  3. Existence: does the recorded cash balance correspond to an account and transactions evidenced by the bank?
  4. Cut-off: are transactions recorded in the appropriate accounting period?

The reconciled amount is normally derived from either side. Starting from the bank balance, add or subtract genuine timing differences to reach the adjusted book balance. Starting from the ledger, post valid items such as charges or interest and isolate unresolved differences. Both routes should produce the same supported balance.

Bank reconciliation covers the whole bank account. It can include customer receipts, supplier payments, payroll, taxes, fees, transfers, interest and corrections. Invoice-to-payment reconciliation is narrower: it links a receipt or payment to the invoice or invoices it settles.

A bank account may reconcile even while a customer receipt remains unallocated in accounts receivable. Conversely, an invoice may be marked paid against an imported transaction even though the full bank account has not been reconciled. Finance teams should therefore maintain both controls: account-level completeness and transaction-level allocation.

A concrete example

Assume the bank statement closes at €52,480 on 31 July. The cash ledger shows €51,530.

  • A customer transfer of €750 reached the bank late on 31 July but has not yet been posted to the ledger.
  • A €50 bank fee appears on the statement and has not yet been recorded.
  • A supplier payment of €250 was recorded in the ledger on 31 July but settled at the bank on 1 August.

The ledger needs two entries: debit cash and credit the relevant receivable or suspense account for €750; debit bank fees and credit cash for €50. Its adjusted balance becomes €52,230. The outstanding supplier payment is a valid timing difference: €52,480 bank balance less the €250 payment not yet booked by the bank also equals €52,230.

The two adjusted balances agree, while the €250 timing item remains listed until it clears. If they had not agreed, the preparer would return to source records rather than post an unexplained plug.

Evidence and ownership

A reconciliation file should identify the legal entity, bank account, currency, period, statement closing balance and ledger balance. It should include the transaction population, each reconciling item, supporting evidence, preparer, reviewer and dates. Age unresolved items and assign each to an owner with a next action.

For euro payments, settlement timing matters. The ECB explains that its TARGET Instant Payment Settlement service operates continuously, while business-day and value-date conventions can still differ for weekend transactions. See the ECB TIPS overview and documentation. The relevant evidence is the bank’s booked and value dates, not an assumption based only on when a payment was initiated.

General best practice

  • Reconcile every active account at a frequency proportionate to transaction volume and risk.
  • Preserve raw bank data separately from transformed or enriched data.
  • Use stable transaction identifiers where available; do not rely on description text alone.
  • Separate matched, genuine timing, adjustment required and unresolved statuses.
  • Require independent review for material accounts and sensitive manual journals.
  • Never delete a difference merely because it is old. Resolve, correct or formally write it off under an approved policy.

These are general control practices. Their implementation depends on the company’s accounting framework, materiality, systems and segregation-of-duties requirements.

In Invunion

Invunion covers the transaction-level part: it matches incoming bank transactions with the invoices you issued, and refunds with the credit notes you issued. It does not compare a bank closing balance with a general-ledger cash balance, so keep your account-level reconciliation alongside it.

  • Bank data. Connect a bank account through open banking, download statements from your bank over EBICS, or import camt.053, MT940, CSV or JSON statement files. IBANs and account numbers are stored encrypted.
  • Scope. Money in for issued invoices and refunds of issued credit notes are in scope. Supplier payments, payroll, tax and bank fees stay stored but out of matching, and you can set exclusion and inclusion rules.
  • Matching. Every bank line and invoice pair gets a match level: Certain when the bank line cites the invoice, Strong for the exact amount from the right payer, Possible for a weaker link. Certain pairs are confirmed, and by default so are Strong pairs that are the only candidate for the line. Everything else waits in the Match inbox for a person.
  • Evidence. The audit log records who or what acted on each record and what changed, and you can export it as CSV or JSON.

Each proposal shows its match level, so you can read why a pair was proposed. See Match levels and Transaction status and scope in the Guide.

Sources

Updated