Keeping your business finances accurate is an important part of running a successful small business. One of the most useful bookkeeping tasks you can perform regularly is reconciling your business bank account.
A bank reconciliation involves comparing the transactions recorded in your bookkeeping or accounting system with the transactions shown on your business bank statement. The goal is to make sure the two records agree and that any differences are identified and explained.
While bank reconciliation may sound complicated, it becomes much easier when you follow a consistent process. Regular reconciliation can help you identify errors, detect missing transactions and maintain accurate financial records.
In this guide, we explain how to reconcile your business bank account step by step.
What Is a Bank Reconciliation?
A bank reconciliation is the process of comparing your business accounting records with your bank statement.
Your bookkeeping records may show deposits, payments, transfers, fees and other transactions. Your bank statement shows the transactions that have actually been processed through your bank account.
Ideally, the ending balance in your accounting records should match the corresponding bank balance after accounting for legitimate timing differences and outstanding transactions.
If the balances do not match, you need to investigate the difference.
Why Is Bank Reconciliation Important?
Regular bank reconciliation helps keep your business financial records accurate and up to date.
It can help you:
- Find missing transactions
- Identify duplicate transactions
- Detect bookkeeping errors
- Identify unexpected bank charges
- Check that deposits and payments have been recorded correctly
- Monitor your business cash flow
- Keep accounting records accurate
- Prepare more reliable financial reports
Reconciling your business bank account can also provide greater confidence that the financial information you use to make business decisions is accurate.
How Often Should You Reconcile Your Business Bank Account?
Many small businesses reconcile their bank accounts monthly. Monthly reconciliation is often practical because banks generally provide monthly statements and it creates a regular bookkeeping routine.
Businesses with a high volume of transactions may benefit from reconciling more frequently, such as weekly.
The important thing is to choose a schedule that suits your business and follow it consistently. Waiting until the end of the financial year can make it much harder to identify the source of errors.
Step 1: Get Your Bank Statement
Start by obtaining the relevant bank statement for the period you are reconciling.
You will need the statement’s opening balance, closing balance and list of transactions.
If your bank provides electronic statements, download the relevant statement and keep it with your financial records.
Make sure you are working with the correct business bank account and accounting period.
Step 2: Check the Opening Balance
Before reviewing individual transactions, compare the opening balance on your bank statement with the opening balance in your accounting records.
If the opening balances do not agree, there may be an issue from a previous reconciliation.
Do not simply change the opening balance to make the numbers match. Instead, investigate why the difference exists.
Resolving previous discrepancies can help prevent errors from carrying forward into future accounting periods.
Step 3: Compare Transactions
Next, compare each transaction on your bank statement with the corresponding transaction in your bookkeeping system.
Look for deposits, withdrawals, electronic payments, transfers, bank fees and other transactions.
Mark transactions as reconciled as you confirm that they appear correctly in both records.
If your bookkeeping software offers automatic bank feeds, many transactions may already have been imported. However, you should still review them rather than assuming every imported transaction is correct.
Step 4: Identify Missing Transactions
One common reason for differences between your bank account and accounting records is a missing transaction.
For example, your bank statement may show a monthly bank fee that has not been recorded in your bookkeeping system.
You may also discover that a customer payment has reached your bank account but has not yet been entered into your accounting records.
Record any legitimate missing transactions using the correct date, amount and category.
Step 5: Look for Duplicate Transactions
Duplicate transactions can cause your accounting balance to differ from your actual bank balance.
For example, a transaction might have been entered manually and then imported automatically through a bank feed.
Review transactions carefully and check for duplicates, particularly when using accounting software that automatically imports bank activity.
If you find a duplicate, remove or correct it according to your bookkeeping procedures.
Step 6: Check for Timing Differences
Not every difference means there is an error.
Some transactions may appear in your accounting records before they appear on your bank statement.
For example, you might record a payment at the end of the month, but the payment may not clear your bank account until the following month.
These timing differences should be identified and documented rather than incorrectly changing your accounting records.
Step 7: Investigate Bank Fees and Charges
Banks may charge account fees, transaction fees, international payment fees or other charges.
If these fees appear on your bank statement but are missing from your bookkeeping records, record them using the appropriate expense category.
Regular reconciliation makes it easier to identify these charges and ensures they are included in your business financial records.
Step 8: Review Unusual Transactions
Bank reconciliation is also a useful opportunity to look for transactions that you do not recognise.
If you notice an unfamiliar payment or withdrawal, investigate it promptly.
It could be a legitimate transaction that has been recorded incorrectly, an automatic payment you forgot about or an issue that requires further investigation with your bank.
Regular reviews can help you identify problems sooner rather than discovering them months later.
Step 9: Confirm the Reconciled Balance
Once you have reviewed the transactions and accounted for legitimate differences, compare the final balances.
Your accounting records should reconcile with the bank statement after considering outstanding or timing-related transactions.
If the numbers still do not match, go back through the reconciliation carefully.
Check transaction dates, amounts, duplicate entries, missing transactions and previous reconciliation balances.
Avoid forcing the figures to match by entering unexplained adjustments. An unexplained adjustment can hide the real source of an accounting error.
Use Bookkeeping Software to Make Reconciliation Easier
Modern bookkeeping software can make bank reconciliation considerably easier.
Many platforms allow you to connect your business bank account and automatically import transactions. You can then match imported transactions with invoices, expenses and other records.
Some systems can also identify potential matches or recurring transactions.
Automation can save time, but it does not eliminate the need for review. You should still check that transactions have been categorised correctly and investigate unusual activity.
Make Bank Reconciliation a Regular Habit
The best way to make bank reconciliation manageable is to treat it as a routine bookkeeping task.
Set aside time each week or month to reconcile your business bank account. Keeping your records current means there are fewer transactions to review and fewer opportunities for errors to become difficult to trace.
Regular reconciliation also gives you a clearer picture of your business cash position.
Final Thoughts
Knowing how to reconcile your business bank account is an essential small business bookkeeping skill. By regularly comparing your bank statement with your accounting records, you can identify missing transactions, duplicate entries, bookkeeping errors and unexpected charges.
The process does not need to be complicated. Obtain your bank statement, check the opening balance, compare transactions, investigate differences and confirm the final balance.
If your business has complex financial records or reconciliation is becoming difficult to manage, consider speaking with a professional bookkeeper or accountant.
Most importantly, do not wait until tax time to review your bank account. Regular bank reconciliation helps keep your financial records accurate, organised and useful throughout the year.
