Bank statements, reconciliation and cash management
The cash a business thinks it has and the cash its bank says it has are rarely the same on any given day. A bank reconciliation explains the difference, catches errors, and shows which entries still have to be made. This lesson reconciles the account of a small fictional cafe, with a calculator that finds the unexplained difference, and then looks at how Alphabet and Meta Platforms hold cash, what counts as a cash equivalent, and how many days of costs their cash would cover.
- Level
- Beginner
- Reading time
- About 24 minutes
- Know this first
- Refinancing and restructuring
By the end you will be able to:
- explain why a company's cash balance and its bank statement balance differ
- prepare a bank reconciliation and say which items need journal entries
- spot a likely transposition error from the size of a difference
- define cash and cash equivalents, and read the cash positions of two companies
- explain why businesses hold cash buffers and what holding too much costs
Two records of the same cash
A business keeps its own record of its bank account, called the books, and the bank keeps another, shown on the bank statement. They describe the same money, and on any given day they almost never agree. A cheque written last Friday may not have been cashed yet. A deposit made after the bank closed may not appear until tomorrow. The bank may have charged a fee that the business has not seen.
A bank reconciliation is the report that explains the difference. According to the OpenStax accounting text, it explains and documents the differences between the bank's balance and the company's book balance, and helps confirm that all cash transactions are recorded correctly in both places. This lesson reconciles the account of a fictional cafe, Lantern Cafe, then turns to how companies manage the cash itself, using Alphabet and Meta Platforms.
Why the balances differ
The reasons fall into two groups. Some are timing differences, where the business has recorded a transaction that the bank has not yet processed. These adjust the bank side:
- Deposits in transit are deposits the business has recorded but the bank has not yet credited. They are added to the bank balance.
- Outstanding cheques are cheques the business has written and recorded but the bank has not yet paid. They are subtracted from the bank balance.
- Bank errors, such as a cheque charged to the wrong account, are corrected on the bank side.
Others are things the bank knows and the business does not yet. These adjust the book side:
- Interest the bank has credited, and amounts the bank has collected on the business's behalf, are added to the books.
- Bank service fees are subtracted.
- NSF cheques are customers' cheques that the bank has returned because the customer's account had not sufficient funds. The money the business thought it had is gone, so they are subtracted.
- The business's own errors, such as recording a cheque for the wrong amount, are corrected.
After the adjustments, the two sides must agree. If they do not, something has been missed or recorded wrongly, and the search starts.
Reconcile Lantern Cafe
The bank statement shows $18,640 at month end. The bank credited $25 of interest and charged a $40 fee. Set the balance in the cafe's books, the deposits in transit, the cheques not yet cashed and the customer cheque that came back unpaid. The left page adjusts the bank balance, and the right page adjusts the books. At the starting settings the two agree.
Both sides come to $17,390, so the cash is reconciled. The books need entries for the interest, the fee and any returned cheque, which change the cash account by −$615. The deposits in transit and unpresented cheques need no entry, because the books already show them.
Four experiments. First, at the starting settings both sides reach 17,390. The books need entries for the three book-side items, which together change the cash account by −$615, and the deposits in transit and cheques not yet cashed need none. Second, set the book balance to 18,275. The sides now differ by $270, and 270 is a multiple of 9. A difference divisible by 9 is a classic sign that two digits were swapped when an amount was entered: a cheque for $1,520 entered as $1,250 gives exactly this gap. Third, set the book balance to 18,000. The difference is $5, not a multiple of 9, so it is worth checking each item against the statement. Fourth, set deposits in transit to none without changing anything else. The adjusted bank balance falls to $15,890 and the sides are $1,500 apart, with the books higher. Either a deposit in transit was left off the list or an entry in the books is wrong, and the first thing to check is whether the last day's deposit has reached the bank.
The reconciliation as a statement, at the starting settings:
| Lantern Cafe, month end, dollars | Amount |
|---|---|
| Balance on the bank statement | 18,640 |
| Add: deposits in transit | 1,500 |
| Less: cheques written but not yet cashed | (2,750) |
| Adjusted bank balance | 17,390 |
| Balance in the cafe's books | 18,005 |
| Add: interest credited by the bank | 25 |
| Less: bank service fee | (40) |
| Less: customer cheque returned unpaid (NSF) | (600) |
| Adjusted book balance | 17,390 |
Only the book-side items need journal entries, because only they are things the business has not recorded. The table lists each item and where it goes.
| Item on the reconciliation | Which side it adjusts | Journal entry in the books? |
|---|---|---|
| Deposit in transit | Bank side, added | No: already recorded |
| Cheque written but not yet cashed | Bank side, subtracted | No: already recorded |
| Bank error | Bank side | No: the bank corrects it |
| Interest credited by the bank | Book side, added | Yes |
| Bank service fee | Book side, subtracted | Yes |
| Customer cheque returned unpaid (NSF) | Book side, subtracted | Yes |
| Error in the company's own records | Book side, corrected | Yes |
What counts as cash
The balance reconciled above is cash in a bank account. In a company's accounts, cash has a wider meaning. Under IAS 7, the international standard for cash flow statements, cash comprises cash on hand and demand deposits, and cash equivalents are short-term, highly liquid investments that can readily be converted to known amounts of cash. They are held to meet short-term cash commitments and not for investment. An investment normally qualifies only if it has a short maturity, say three months or less from the date of acquisition. Longer-dated or more variable investments, such as bonds of several years, are reported separately, often as marketable securities.
The line matters because a company that reports a large "cash and securities" total may hold only part of it as immediately spendable money.
Alphabet and Meta Platforms
Two of the world's largest technology companies hold very large cash positions, and they hold them differently. The table works from their year-end 2025 balance sheets and income statements. Total costs and expenses include non-cash charges such as depreciation, so the days of cover are a rough guide, and probably understate how long cash would last.
| 31 December 2025 | Alphabet | Meta Platforms |
|---|---|---|
| Cash and cash equivalents, $ million | 30,708 | 35,873 |
| Marketable securities, $ million | 96,135 | 45,719 |
| Total, $ million | 126,843 | 81,592 |
| Cash and equivalents as a share of the total | 24.2% | 44.0% |
| Total as a share of total assets | 21.3% | 22.3% |
| Total divided by current liabilities | 1.23 times | 1.95 times |
| Days of the year's total costs the total would cover | 169 | 253 |
| Change in the total during 2025 | +32.6% | +4.9% |
Alphabet held $126.8 billion in cash and securities, of which 24.2% was cash and cash equivalents, and Meta held $81.6 billion, of which 44.0% was. Alphabet's total would cover 169 days of the year's costs and Meta's 253 days. Against current liabilities, Alphabet's total is 1.23 times and Meta's 1.95 times. Alphabet's total rose 32.6% during 2025 and Meta's 4.9%. Both hold part of their reserve in securities rather than in cash, which is a choice about how much to keep immediately spendable. The figures describe each company's choice. They do not say which is wiser, since each also invests heavily and has other plans for its cash.
Why businesses hold cash, and what it costs
Companies hold cash for three reasons. The first is to pay day-to-day bills, wages and suppliers. The second is as a buffer for the unexpected: a sales slump, a late-paying customer, a sudden repair. The third is to be ready for a planned use such as an acquisition, a large investment or a debt repayment. The lesson on working capital showed how the timing of payments and receipts drives the cash a business needs, and the lesson on liquidity ratios showed how to measure the buffer.
Holding cash has a cost. Money in a current account earns little or nothing, and the same money invested in the business or returned to owners could earn more. Treasurers therefore try to keep what they need for operations in the bank, and to place the surplus in short-dated, safe investments that still count as cash equivalents. A good cash manager forecasts the weeks ahead, reconciles every account regularly so that errors and fraud are noticed, and knows how much the business could draw on from a credit line if needed.
What reconciliation cannot tell you
- Agreement is not proof of accuracy. Two records can agree and both be wrong, if a transaction is missing from both.
- The calculator is a simplified month. A real reconciliation has many more items, such as collections by the bank, foreign exchange differences and bank errors, and stale cheques that are never cashed.
- A multiple of 9 is a clue, not a diagnosis. It suggests a swapped-digit error but does not prove one.
- Company cash totals are a snapshot. A year-end balance can differ greatly from the average through the year, and some cash is held abroad or is restricted.
- Days of cover is a rough measure. Costs include non-cash items, and a company's cash needs are not spread evenly.
Common mistakes
Adjusting the wrong side
Deposits in transit and outstanding cheques adjust the bank balance. Interest, fees, NSF cheques and the company's own errors adjust the books.
Making a journal entry for a timing item
The business has already recorded deposits in transit and outstanding cheques. Recording them again would be a mistake.
Forcing the numbers to agree
A balancing figure hides a problem. If there is a difference, find it.
Treating all securities as cash
Only short-term, readily convertible investments qualify as cash equivalents. Marketable securities of longer maturity do not.
Reading a large cash balance as always good
It gives safety, and it can also mean the money is idle. Look at what the company does with it.
Try it yourself
1. A bank statement shows $10,000. There is a deposit in transit of $1,200 and there are outstanding cheques of $800. What is the adjusted bank balance?
Show the working
10,000 + 1,200 − 800 = $10,400.
2. The books show $10,760. The bank credited $15 of interest and charged a $25 fee, and returned a customer's $350 cheque as NSF. What is the adjusted book balance, and does it match question 1?
Show the working
10,760 + 15 − 25 − 350 = $10,400. It matches the adjusted bank balance, so the account is reconciled. Three journal entries are needed, for the interest, the fee and the returned cheque.
3. Which of these need a journal entry in the company's books: a deposit in transit, an NSF cheque, an outstanding cheque, a bank service fee?
Show the working
The NSF cheque and the bank service fee. They are things the bank knows and the company has not yet recorded. The deposit in transit and the outstanding cheque are already in the books.
4. A reconciliation is out by $270. Why might a transposition be the cause?
Show the working
Swapping two digits changes a number by a multiple of 9. 270 ÷ 9 = 30, so it fits. A cheque for $1,520 recorded as $1,250 differs by 1,520 − 1,250 = $270. It is a clue, so check the entries against the statement to be sure.
5. Meta held $35,873 million in cash and cash equivalents and $45,719 million in marketable securities. What share of the total was cash and cash equivalents?
Show the working
Total = 35,873 + 45,719 = $81,592 million. Share = 35,873 ÷ 81,592 = 44.0%. The rest was held in securities that do not count as cash equivalents.
Where this is used
- A bookkeeper reconciles each bank account at month end, before the accounts are closed.
- An auditor checks the year-end reconciliations to confirm the cash balance in the accounts.
- A treasurer decides how much to keep in the bank, how much to invest short term and how much credit to hold in reserve.
- An analyst compares a company's cash and securities with its current liabilities and costs.
Key terms
- Bank statement
- The bank's record of the deposits, withdrawals, fees and interest on an account.
- Bank reconciliation
- A report that explains the difference between the bank balance and the book balance.
- Deposit in transit
- A deposit recorded by the company but not yet credited by the bank.
- Outstanding cheque
- A cheque written and recorded by the company but not yet paid by the bank.
- NSF cheque
- A cheque returned unpaid because the payer's account had not sufficient funds.
- Cash equivalent
- A short-term, highly liquid investment that is readily convertible to known amounts of cash.
- Marketable securities
- Investments that can be sold readily but are not short enough to count as cash equivalents.
- Transposition error
- An error in which two digits are swapped when an amount is written down.
Questions people ask
How often should a bank account be reconciled?
At least once a month for most businesses, and more often for accounts with many transactions. The sooner an error is found, the easier it is to trace.
Why do businesses still use cheques in the examples?
They show the timing difference most clearly. The same logic applies to card settlements and transfers that take a day or more to clear.
Is cash on the balance sheet the same as the bank balance?
Not exactly. The balance sheet shows the adjusted book balance, which already includes the items the reconciliation brings in, and may include cash equivalents.
Does a reconciliation catch fraud?
It can reveal unexpected items, such as payments the business did not make. Good practice is for someone other than the person who handles the cash to do it.
Sources and review
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting, section 8.6: Define the purpose of a bank reconciliation, and prepare a bank reconciliation and its associated journal entries, for the purpose of a reconciliation, which items adjust the bank balance and which the book balance, and which need journal entries.
- IFRS Foundation, IAS 7 Statement of Cash Flows, paragraphs 6 and 7, for the definitions of cash and cash equivalents, including a short maturity of three months or less from the date of acquisition.
- Alphabet Inc., Fourth quarter and fiscal year 2025 results, for cash and cash equivalents, marketable securities, total assets, total current liabilities and total costs and expenses.
- Meta Platforms, Inc., Fourth quarter and full year 2025 results, for cash and cash equivalents, marketable securities, total assets, total current liabilities and total costs and expenses.
How the numbers were checked: the adjusted balances and differences were recomputed in plain code, and the calculator, which runs separately, was compared with that code across a grid of inputs. The cash figures for Alphabet and Meta come from the releases cited above, and every ratio was recomputed from them. Lantern Cafe is invented for teaching.