Common Causes of Discrepancies in Bank Reconciliation

Bank reconciliation is a critical internal control process that compares a company’s cash records to the bank’s statement balance. Discrepancies are common and arise due to timing differences, human error, or unrecorded transactions. If left unresolved, these inconsistencies can distort financial reports, affect cash flow planning, and even conceal fraudulent activities. By understanding the root causes of such discrepancies, businesses can take proactive measures to enhance financial accuracy and accountability.

1. Outstanding Checks

These are checks issued by the business that have not yet been presented to the bank for payment by the recipient.
While the business records these checks immediately as payments (reducing the cash balance), the bank only deducts them once they are actually cleared, creating a mismatch.
This is especially common with post-dated checks or when payees delay depositing them.
Failure to track outstanding checks can result in an overestimation of available cash and may lead to overdrafts or bounced payments.

2. Deposits in Transit

These refer to deposits (usually cash or cheques) that the company has recorded in its books but which have not yet appeared in the bank statement.
This typically occurs when deposits are made late in the day, over weekends, or during holidays when banks are closed.
Until the bank processes these transactions, the company’s ledger shows a higher balance than the bank’s records.
To maintain accuracy, such deposits must be monitored closely and verified in subsequent bank statements.

3. Bank Charges and Fees

Banks routinely deduct service fees for account maintenance, ATM usage, cheque clearing, and other services.
If these fees are not recorded by the company until the bank statement arrives, they cause discrepancies.
While often small, these fees accumulate and may affect reconciliations, especially if they are overlooked across multiple months.
Proper procedures should be in place to anticipate and record recurring fees in the cash book.

4. Direct Debits and Standing Orders

These are automatic withdrawals from the bank account for regular payments such as loan installments, insurance premiums, utility bills, and subscriptions.
Often, such transactions are set up by departments other than accounting and may not be immediately entered into the company’s books.
Unless the accounting team is promptly informed, these withdrawals cause unexplained reductions in the bank balance during reconciliation.
A centralized payment schedule and inter-departmental communication can prevent such oversights.

5. Direct Credits and Bank Collections

Occasionally, customers or clients may deposit payments directly into a company’s bank account without prior notification.
These receipts may include online transfers, bank drafts, or third-party settlements such as rebates or commissions.
Without prompt entry in the company’s cash book, the bank balance appears higher than the book balance.
Such discrepancies can be reduced by reconciling receivables daily and confirming receipts with customers.

6. Errors in the Cash Book

Errors in the cash book—such as arithmetic mistakes, duplicated entries, transposed figures, or incorrect posting—are frequent sources of discrepancies.
Common examples include recording a deposit of RM5,850 instead of RM8,550 or omitting a transaction entirely.
These errors can significantly affect financial statements if not detected and corrected promptly.
Frequent internal audits and double-checking of entries help reduce such clerical mistakes.

7. Errors by the Bank

Although rare, banks can make errors such as posting transactions to the wrong account, processing duplicate withdrawals, or failing to credit a deposit.
These mistakes must be identified by the company during reconciliation and reported to the bank for correction.
Documentation such as deposit slips, cheque stubs, and payment confirmations can be used to substantiate claims.
Persistent bank errors may indicate deeper issues in banking relationships and should be escalated appropriately.

8. Unrecorded Transactions

Businesses may fail to record transactions such as bank interest earned, returned cheques, or penalties for insufficient funds.
These items show up on the bank statement but not in the company’s ledger, leading to imbalances.
Regularly reviewing bank statements in full—not just for major debits and credits—ensures such transactions are not missed.

9. Timing Differences

Timing discrepancies arise when there is a delay between the recording of a transaction by the company and its reflection in the bank statement.
This is common in electronic fund transfers, inter-bank transactions, or cheque clearing processes.
While these differences usually resolve over time, they can temporarily distort the reconciliation unless properly noted.

Bank Reconciliation Discrepancies: Identifying and Resolving Common Issues

Discrepancies in bank reconciliation are not unusual, but when left unchecked, they can compromise financial accuracy and credibility. By understanding and monitoring common causes—such as timing differences, data entry errors, and unrecorded transactions—businesses can maintain control over their cash flows, improve audit readiness, and ensure compliance with accounting standards. A strong reconciliation process is a pillar of sound financial management.