What is inter-bank reconciliation — reconciling balances between bank accounts?

What does inter-bank reconciliation actually compare?

A bank reconciliation looks at one account from two angles: it compares the cash balance in your accounting records with the corresponding balance on that account's bank statement.

Inter-bank reconciliation looks across accounts. It takes each movement between two of your accounts and puts the sending account's record of it next to the receiving account's record of the same movement. The question is no longer "do my books agree with this bank?" but "did what left account A arrive in account B, for the same amount, and do I know where it is if it has not arrived yet?"

You may also see it called transfer reconciliation, account-to-account reconciliation or inter-account reconciliation. Auditors use a version of it called a bank transfer schedule. The schedule lists the transfers into, out of and between a client's bank accounts and checks that each withdrawal and its matching deposit were recorded in the same reporting period, so the same cash is not counted twice. Auditors use it to test for kiting — the same cash deposit appearing in two accounts at the same time.

Does your business need it?

Probably not if you have only one bank account. Otherwise, you need it when any of these apply:

• You move money between your own accounts. Operating to payroll, operating to tax savings, a merchant deposit account to operating. Every one of these transfers has two sides.
• Your accounts are at different institutions. Each bank has its own cut-off times and posting days, so the two sides of one transfer often land on different dates.
• A bank moves money for you automatically. Sweep and zero-balance arrangements move funds between accounts on a schedule set by the bank, not by an entry you made.
• Your cash is spread across banks. If you hold a reserve at one bank and operate from another, total cash is only right if nothing is counted in both places or missing from both.
• Related businesses under common ownership move money between their accounts. The comparison then spans two sets of books (covered below).

Which records go side by side, and as of when?

Fix one as-of moment first, for example the close of business on the last day of the month, and use it for both accounts. If you compare account A as of June 30 with account B as of July 2, every transfer made in between looks like a discrepancy, and you end up investigating your own method instead of your records.

For that moment, assemble:

1. Every transfer out of account A to account B, from A's bank activity and your books: date sent, amount, reference.
2. Every transfer into account B from account A, from B's bank activity and your books: date received, amount, reference.
3. The balance of your funds-in-transit (or transfer clearing) account at the as-of moment, if you use one.

Match each outgoing transfer to one incoming transfer by amount, reference and date sequence. The two accounts agree when:

• every outgoing transfer has exactly one matching incoming transfer, or is listed as in transit with a sent date and an expected arrival date;
• no incoming transfer is left without a source;
• the funds-in-transit balance equals the total of the listed in-transit items.

How does a funds-in-transit position carry a movement between accounts?

A transfer is one event with two sides, but the two sides can land on different days. The funds-in-transit account holds the movement while it has left one account and not yet reached the other. It works like the deposit in transit on a bank reconciliation, which is cash or checks recorded by you but not yet recorded by your bank, except that here both sides are your own accounts.

Example. On June 30 the business sends 25,000.00 from Operating (Bank 1) to Payroll (Bank 2). Bank 1 debits the account on June 30. Bank 2 credits Payroll on July 1.

At the close of June 30 the 25,000.00 shows in two places across the two records: Bank 1's statement records it as a withdrawal on June 30, and your books hold it in Funds in transit. It is not yet in Payroll, and it is not counted twice. Your June 30 comparison should show:

This passes the same-period test because the funds-in-transit balance is counted as cash at June 30: the 25,000.00 is out of Operating and in Funds in transit on the same date, so the cash total is right and nothing is counted twice. On July 1 the item clears and the in-transit balance returns to zero. How to set up and post the transfer in your own software belongs to the guide on recording transfers between your own bank accounts.

When a residual is expected and when it is a defect. A balance in funds in transit at month end is expected when it is made up of transfers sent in the last day or two, each listed with its expected arrival date. It is a defect when it cannot be broken down into specific transfers, or when an item is still there after the time that transfer method normally takes. Old items should be aged, investigated and documented, and corrected once traced. A write-off is only for an item whose fate has been traced and documented as a loss — never a way to clear a balance you cannot explain. Carried forward without that, old items can hide errors, fraud, duplicate postings or transactions recorded in the wrong account.

Do not clear an unexplained in-transit balance with an adjusting entry. Trace the transfer into the receiving account's bank activity. An adjusting entry removes the only record that the money was ever missing, and no later comparison will find it again.

Why can two banks record the same transfer in different periods?

Because each institution and each payment system has its own business day, cut-off and posting rules. Nothing below is a universal settlement time. Check the terms for your own banks and payment method.

• Bank cut-off times. Each bank or credit union has a cut-off time for the end of its business day. A transfer arriving at the receiving bank after its cut-off can be treated by that bank as received on the next business day.
• Wire business days. For the Federal Reserve's Fedwire Funds Service, a funds-transfer business day starts at 9:00 p.m. ET on the previous calendar day and ends at 7:00 p.m. ET. For Fedwire, all Saturdays and Sundays are holidays. That is the schedule between banks; your own bank has its own cut-off for the end of its business day, so ask by what time it needs your request. A wire initiated on a Friday evening or over a weekend can carry a later business date than the day you sent it.
• ACH processing windows. Same Day ACH is a designated entry type, not the default: a transfer settles the same day only if your bank originates it as a Same Day ACH entry, identified by today's date in the Effective Entry Date field and submitted to the ACH Operator in time. Under the Nacha rule as adopted in 2021, the third Same Day ACH window allows files to be submitted until 4:45 p.m. ET, with settlement of those entries at 6:00 p.m. ET. The precise timing of the processing windows is determined by each ACH Operator rather than set in the Rules, so confirm the current schedule with your own bank.

A difference caused by any of these is a timing position. Carry it in transit, with its expected arrival date, and expect it to clear. It is not an error.

What is an amount that shows in one account and not the other?

At the moment you see it, every unmatched item looks the same. These checks separate them:

ACH returns carry reason codes. Administrative returns include R02 (Account Closed), R03 (No Account/Unable to Locate Account) and R04 (Invalid Account Number Structure). A returned transfer comes back to the sending account some time after the original left it, so an in-transit item that ages past its expected date should prompt a check of the sending account for a return.

Two recording errors show up only in this comparison:

• A transfer booked as income or expense. If the receiving side is recorded as a sale, or the sending side as an expense, both cash balances still agree with their statements. Revenue or expenses are overstated, and nothing on either bank reconciliation looks wrong. The comparison shows an outgoing transfer with no incoming transfer booked against it.
• A transfer booked twice. When both banks' feeds report the movement and each report is entered as a separate transaction, the event is recorded twice. The extra entry usually sits in the in-transit or transfer account rather than distorting either cash balance. Record each transfer once, as one event with two sides.

Which comes first: each account's own reconciliation or the comparison between them?

Reconcile each account to its own statement first, then compare the two. When both tie-outs are current, any remaining difference between the accounts comes from the transfers themselves, and you can tell which side it belongs to.

You can run the comparison first to decide where to look. A transfer that is missing from B tells you which account's reconciliation to investigate. The results are provisional, though. If one account is not reconciled, a difference could come from that account's own unrecorded items, and you may be rediscovering something its reconciliation would have caught. Do not treat a comparison against an unreconciled account as agreement. It can show a problem, but it cannot show that none exists.

How do sweeps and related entities change the comparison?

Sweep and zero-balance arrangements. You did not initiate these movements, so you cannot predict them from your own entries. In a zero-balance account, a balance of zero is maintained by automatically transferring funds from a master account in an amount only large enough to cover checks presented. Take the movements from the bank's records instead. One U.S. bank's treasury-management service, for example, shows sweep transactions daily in its online banking and provides a monthly statement for both the sweep account and the operating account that identifies every sweep transaction; ask your own bank what it provides. Match each sweep out of one account to its sweep into the other the same way you match any transfer. Sweeps that post on the bank's schedule are expected movements, not exceptions. A sweep that appears on one side only is an exception and goes back to the bank.

Accounts belonging to different legal entities. If the two accounts belong to separate businesses under common ownership, each business records only its own side in its own books. Agreement then means two sets of books agree, not two accounts inside one ledger. There is no shared funds-in-transit account: money sent to the other entity has left your business, so each set of books records its own side and the two are agreed against each other, not through a single in-transit balance. An unresolved difference is wrong in both entities' records. The bookkeepers for both entities should agree on the as-of moment and exchange their lists of transfers sent and received. Each entity keeps its own copy of the signed comparison. Resolve an exception by agreement between the two sides, with the correcting entry made in whichever entity recorded the transfer wrongly. How the balances between the entities are accounted for, and any tax effect, are outside this comparison.

How often should you run it, and what should it leave behind?

Run it whenever you reconcile the accounts involved. Reconcile every bank account at regular intervals: at a minimum, shortly after the end of each month. A daily reconciliation against the bank's month-to-date information is better. If you move money between accounts often, or near month end, run the comparison at least monthly and look again at the in-transit list a few days into the new month to confirm everything arrived.

Each run should leave a record that someone else can follow:

• the as-of moment used for both accounts;
• the list of transfers sent and received, with dates, amounts and references, and the match between them;
• the in-transit list with each item's expected arrival date, and the date it actually cleared;
• every exception, its classification (one-sided, misposted, deducted, returned, duplicated or misrecorded) and how it was resolved;
• the preparer's signature and date, and the reviewer's approval.

Sign and date the working paper and have someone other than the preparer review it.

What does it catch that each account's own reconciliation misses?

A single bank reconciliation proves only that one account's books match one bank. It cannot see what should have arrived somewhere else. The comparison between accounts catches:

• Cash counted twice. A transfer's deposit recorded in one period while its withdrawal is left to the next inflates total cash. The bank transfer schedule exists to check that both dates fall in the same period.
• Transfers that never arrived. Misdirected and returned transfers leave the sending account reconciled and the receiving account reconciled, with the money missing between them.
• Irregular transfers. Putting every movement between accounts on one schedule makes unusual amounts, unexpected destinations, or transfers made at atypical times easier to identify and investigate.