Bank reconciliation: step-by-step method and mistakes to avoid

Quick answer. A bank reconciliation explains, at a given date, the gap between the balance of account 512 (Bank) in your accounting records and the balance on the statement sent by your bank. You tick off the matching transactions, list the reconciling items on each side, record the forgotten entries (charges, overdraft interest, direct debits), then check that the two adjusted balances are equal.

You keep your books, you look at your bank balance, and it never quite matches the figure on your statement. That is normal. A bank account and an accounting account record the same flows, but not at the same moment or in the same direction. The bank reconciliation is the tool that reconciles the two, justifies your cash position and catches errors, omissions and fraud before they take root.

This article sets out the step-by-step method, shows how to build a reconciliation statement that balances, and reviews the mistakes we see most often in client files, starting with the most expensive one: the reversed debit/credit direction.

A bank reconciliation compares, at a cut-off date, the balance of account 512 (Bank) kept by the company and the balance on the statement kept by the bank. The two almost always differ, and that is expected: there are items in transit, meaning movements recorded on one side but not yet on the other, because of timing differences between the accounting entry and the bank entry.

The goal is not to force the two balances to be identical, but to explain every euro of the gap. A successful reconciliation reads like a proof: here is the accounting balance, here is the bank balance, here is the list of transactions that justify the difference, and once those transactions are taken into account, the two adjusted balances are strictly equal.

Our reading#

A bank reconciliation is not a closing formality, it is a sensor of accounting quality. When it balances effortlessly, your bookkeeping is clean. When it resists, it almost always signals something else: an invoice entered twice, a missing receipt, an unrecorded direct debit, sometimes a movement no one can explain. It is precisely this warning value that makes it impossible to neglect.

The differences fall into two families, depending on who has already recorded the transaction.

The distinction is decisive. A company-side item is a normal timing difference: you paid a supplier by cheque, you recorded it, but the payee has not yet deposited it. Nothing to correct, you simply wait. A bank-side item, by contrast, reveals a transaction the bank has already processed and that you have forgotten: it must be recorded without delay. Bank charges are the textbook case, to be posted to account 627 (Banking services and similar).

Here is the sequence we apply on every file. It works whatever the tool, from a spreadsheet to a connected software such as Pennylane or a business bank such as Qonto.

1. Gather the statement and the account 512 ledger. Note the closing balance on the statement and the accounting balance at the same date. The gap between these two balances is what you are going to explain.
2. Tick off the matching transactions. Tick every movement present on both sides, checking the direction on each line.
3. List the unticked entries on each side. What remains forms the reconciling items: yours on one side, the bank's on the other.
4. Handle items in transit and charges. For each item, decide: a normal timing difference to let run, or a forgotten transaction to record.
5. Record the missing entries on the company side. Post the charges, overdraft interest, direct debits and incoming transfers the bank has already processed.
6. Check that the adjusted balances are equal. Starting from the accounting balance and the bank balance and adding or subtracting the reconciling items, you must reach two strictly equal adjusted balances.

In practice: the reconciliation statement that balances#

The reconciliation statement is the table that formalises the proof. It starts from the two balances and makes them converge.

When both columns reach the same figure, the reconciliation is correct. As long as they diverge, an item is missing, a direction is reversed or an entry is duplicated.

This is the most common mistake, and the most unsettling for beginners. The bank statement is written from the bank's point of view, which is the opposite of yours. For the bank, your deposit is a debt owed to you: it records it as a credit. In your accounting records, the same receipt increases what you hold at the bank: it goes to the debit of account 512.

Remember the rule:

• A customer receipt appears as a credit on the statement but a debit in account 512.
• A supplier payment appears as a debit on the statement but a credit in account 512.

Reversing this direction distorts the whole reconciliation and, more seriously, distorts the direction of your entries. When a balance never lands right and the gap is exactly twice a transaction, it is almost always a reversed direction.

The underestimated risk: stale reconciling items never cleared#

A reconciling item is legitimate only as long as it is in transit. A cheque issued two months ago and still not debited is no longer a timing difference: it is a signal. The payee may never have received it, the cheque may be lost, or the entry may be wrong. Letting stale items drag on, month after month, turns the reconciliation statement into a graveyard of unexplained transactions and hides the real problems. Every item older than a few weeks must be analysed and, where needed, corrected.

We recommend a monthly reconciliation, done as soon as the statement arrives. A monthly rhythm secures cash monitoring, quickly detects errors and anomalies, and underpins the justification of the bank balance at review and closing. A reconciliation pushed back to the year end means twelve months of accumulated gaps to untangle at once, at the worst possible time.

Regular reconciliation also feeds the quality of your FEC, the accounting entries file and supports a monthly close in five days. On the legal framework, a company must keep regular and faithful accounts (French Commercial Code, art. L.123-12 et seq.); the justification of the cash balance relies precisely on the reconciliation.

Points to watch#

• Check the direction of each line before concluding the reconciliation is wrong; it is the leading cause of gaps.
• Never create an adjustment entry to force a balance: an unexplained gap must stay visible until it is resolved.
• Watch items older than one month: they are almost never mere timing differences.
• Clearly separate what is a normal company-side item from what must be recorded on the bank side.

Recently, on a file where the balance never landed right, the owner was reconciling every month and despairing over a gap of around four hundred euros that kept coming back. Going through the statement line by line, two causes stacked up: a subscription debited each month by the bank but never recorded, and a cheque deposit ticked the wrong way. Once the charges were posted to account 627 and the direction corrected, the gap vanished, and a cheque item five months old surfaced: a supplier payment never cashed, which had to be reissued.

What we take from these situations, and we see them regularly: a reconciliation that resists is never a technical detail, it is a file that speaks. The gap points to bookkeeping to revisit, a forgotten transaction or a genuine cash question. That is also why a reconciliation never done is a red flag: without it, a wrong bank balance can run through the whole year unnoticed, until review. Monthly discipline, and where needed an expert eye on stubborn items, is far better than a painful annual clean-up.

As a chartered accountant registered with the Ordre and a statutory auditor, this is one of the first checks we run when taking over a file: a justified account 512 is the foundation of a reliable balance sheet. This logic ties in with the difference between presenting the accounts or simply keeping them, and the same rigour applies to our coherence checklist before closing. When a reconciliation reveals that a file has not been monitored, it often signals a wider problem, such as when your balance sheet is not handed over. Our bookkeeping and accounting review in Paris builds this check into every cut-off.