Bank Reconciliation is a periodic process which helps to Match the Bank Account balance as per the ERP (books of accounts) with the Balance as per the Bank.
Why the difference arises?
First Category of Differences - There are possibility that some of the transactions that are entered in the bank are not entered in the ERP for example
1. A customer deposited money in the bank but did not inform the ERP team of our (let's say USMF) company.
2. Dividend from subsidiary credited to the bank but the ERP team missed to enter in the Books of accounts
3. Some Charges / Interest charged by the Bank but not entered in the ERP.
Second Category of Differences - There are possibility that some of the transactions are entered by the ERP team but those are not entered in the Bank for example
1. Customer check Deposited to Bank but was not cleared.
2. We issued check to vendor on 31st March but vendor submitted and get it cleared on 1st April.
Bank reconciliation helps us to manage these differences.
There are some questions which used to come into my mind when I used to prepare the Bank Reconciliation.
Qns 1. When preparing the bank statement if we found some transaction which get cleared in next period for example vendor was issued check (as discussed above) then should we reverse the transaction and report it again in the next period to make the balance of the bank matching with the books of accounts (ERP Balance).
Ans 1.
Accuracy of Dates: Accounting rules require you to record a payment on the day the check is issued (the day you no longer have control over those funds). If you wrote the check on March 30, it must be recorded in March.
Vendor Aging: If you reverse the check on March 31, the vendor invoice will suddenly appear "unpaid" on your March financial reports, even though you have already sent the payment.
Audit Trail: Reversing a valid payment simply to make a reconciliation screen "match" creates "noise" in the ledger. Auditors look for "reversals" as potential red flags for fraud or error correction.
Statement Ending Balance: You enter the balance from your paper statement (e.g., $10,000).
Transactions List: You see all posted D365 transactions. You tick the ones that appear on the statement.
Outstanding Items: You leave the $1,000 check un-ticked (Uncleared).
The Logic: D365 performs this internal calculation:
Statement Ending Balance ($10,000)
Minus Outstanding Checks ($1,000)
Equals Calculated Book Balance ($9,000)
The check you didn't tick last month automatically carries forward. It will stay in your "Uncleared" list month after month.
The moment that check appears on a bank statement (perhaps in April), you simply tick "Cleared" during the April reconciliation.
The check then moves from "Outstanding" to "Reconciled," and it will no longer appear in future reconciliation windows.
The balance that appears on your financial statements (Balance Sheet and Trial Balance) is always the General Ledger (GL) Book Balance, not the bank statement balance.
In accounting, your financial statements must reflect the transactions the company has authorized and executed. Here is how that works in practice and why it is the correct approach:
1. The GL Balance is the "Source of Truth"
When you generate a Balance Sheet in Dynamics 365 Finance, the system looks at the Main Account assigned to that bank.
Because you posted the check at the end of the month, the ledger has already been credited (reduced).
Therefore, your financial statements show the reduced amount.
Example:
Bank Statement Balance: $10,000
Outstanding Check: $1,000 (Sent to a vendor on the 30th)
Balance Sheet (GL) Amount: $9,000
The $9,000 is what goes to your financial statements. This is correct because, from an accounting perspective, you no longer "own" that $1,000; it has been committed to a vendor.
2. Why the Bank Statement Balance is NOT used
If you reported the bank statement balance of $10,000 on your Balance Sheet, you would be overstating your assets. You would be claiming you have $10,000 available to spend, when in reality, $1,000 of that is already promised to a vendor who holds a legal document (the check) to claim it.
3. The Role of the Bank Reconciliation Report
If an auditor or a manager asks, "Why does the Balance Sheet say $9,000 when the bank says we have $10,000?", you provide the Bank Reconciliation Report.
The reconciliation report acts as a "bridge" or a supporting schedule that proves the $9,000 on the financial statement is accurate. It says:
"We show $9,000 because we know about a $1,000 check that hasn't reached the bank yet."
4. Summary of the Flow
General Ledger: Tracks every transaction the moment it happens. This balance is used for Financial Reporting.
Bank Statement: Tracks only what the bank has processed.
Bank Reconciliation: A control document used to verify that the difference between the two is legitimate (e.g., outstanding checks, deposits in transit, or bank errors).
Accounting Rule: You report what you know (the Ledger), and you reconcile it to what the external party knows (the Bank).
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There are two types of reconciliation in D365: -
1. Simple Bank Reconciliation (Manual Reconciliation) - User manually reconcile the transactions
2. Advance Bank Reconciliation (Automatic Reconciliation) - System performs the initial reconciliation and at the end when there are transactions which system was not able to reconcile, user reconcile those transactions manually.
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In this Blog we will see manual reconciliation and in next blogs we will see automatic bank reconciliations
Reference of Microsoft Blog - Reconcile a bank account - Finance | Dynamics 365 | Microsoft Learn
Manual Bank Reconciliation in D365 can be performed with the help of Bank statement provided by the bank.
In the manual bank reconciliation user has to manually reconcile all the transaction by marking them as reconciled and once all the entries are reconciled, they can mark the bank statement as reconciled.
You can't reconcile a bank statement with a bank account if any of the checks or deposit slip payments that the statement lists currently have a status of Pending cancellation. After a reviewer posts or rejects a check reversal or deposit slip payment cancellation, the status isn't Pending cancellation, and you can reconcile the bank account.
- Go to Cash and bank management > Bank Accounts > Bank accounts.
Select the bank account to reconcile with the bank statement and select Reconcile > Account reconciliation. - Enter information in the Bank statement date and Bank statement fields.
In the Ending balance field, enter the bank account ending balance for the period for which you are doing the reconciliation as per the Bank statement. - Select Transactions to open the Account reconciliation page.
- For each transaction that is included on the bank statement, select the Cleared checkbox if the amount in Dynamics 365 Finance corresponds to the amount on the bank statement.
- You can also enter or modify the value in the Bank transaction type field. This field value is important for bank transaction statistics and for some reports.
Note
Don't select the Cleared checkbox for transactions that aren't on the bank statement. These transactions continue to be displayed in on this page until they're reconciled with a future bank statement.
The Cleared checkbox isn't available if the transaction has a status of Pending cancellation. Transactions have this status if Finance requires that reversals or cancellations are reviewed before they're posted. After a reviewer posts or rejects the reversal or cancellation, the status is no longer Pending cancellation, and you can reconcile the bank account with the bank statement.
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To select the Cleared checkbox for an interval of checks that all are displayed on the bank statement, select Mark check interval, and then indicate the interval. If all transactions in the list can be cleared, select Mark all as cleared.
- If the amount for a bank account transaction doesn't correspond to the amount for the transaction on the bank statement, enter the amount of the correction in the Correction amount field.
Note
If the fiscal period of the transaction to be corrected is closed, you can't use the Correction amount field. Instead, create a line that has a transaction date that is in an open fiscal period for the correction. In this case, you must add the financial dimensions that were used on the original transaction, and also the offset main account. - Create transactions for entries, such as fees and interest, that are on the bank statement but that aren't in Finance. Enter the Bank transaction type and appropriate financial dimensions.
- As you mark the transactions on the bank statement as Cleared, the amount in the Unreconciled field, which is recalculated continuously as you make changes, approaches zero. When it reaches zero, select Reconcile account to post the reconciliation, and the transactions and corrections.
After the reconciliation is posted, the transactions that have been included can't be modified or corrected, and they're not displayed for future account reconciliation. - To view bank transactions that aren't reconciled, use the Unreconciled bank transactions report. To view the bank statement for a bank account, use the Bank statement report.
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Cancel bank statement reconciliation
The Cancel bank statement reconciliation functionality enables you to cancel bank statement reconciliation. You need to enable the Allow bank statement edit parameter. To do this, go to Cash and bank management > Setup > Cash and bank management parameters > Bank reconciliation.
Bank statement reconciliations can only be canceled in the chronological order in which they were entered. When a bank statement reconciliation is canceled, new transactions and corrections are reversed and all other transactions are marked as unreconciled.
To cancel bank statement reconciliation, follow these steps:
Select the bank statement and select Bank statement > Cancel bank reconciliation.
On Cancel bank reconciliation, enter the Reason code, Reason comment, and Cancellation date.
Select OK.