What is bank reconciliation, and how often should I do it?

Money & Running the Business

What is bank reconciliation, and how often should I do it?

The short answer

Bank reconciliation means proving that the balance in your bookkeeping records agrees with the balance on the bank statement after you account for timing differences, fees, errors, and transactions that haven’t cleared.

Do it at least monthly for every business checking, savings, credit-card, and payment-processor account. The IRS’s current Publication 583 specifically recommends reconciling a checking account each month. If money moves quickly or cash is tight, a weekly check can help you catch trouble sooner, but it doesn’t replace the month-end reconciliation.

It’s more than checking for duplicate charges

Your bank and your books answer different questions. The bank tells you what has cleared. Your books should tell you what the business earned, spent, owns, and owes.

Those balances may differ for an innocent reason. A $500 check recorded on June 29 may not clear until July 2. A card processor may collect $1,000 from customers, subtract fees and refunds, and deposit only $870. Reconciliation explains every difference instead of forcing the numbers to match.

A small example

Your June bank statement ends at $5,240. Your bookkeeping balance shows $5,100.

You find:

  • a $200 customer payment recorded in the books on June 30 but deposited by the bank on July 1.
  • a $35 bank fee on the statement that isn’t in the books.
  • a $25 customer check recorded in the books that was returned unpaid.

The $200 is a timing difference. It belongs on a reconciliation list, not as a second sale. The $35 fee and $25 returned payment are missing book entries that must be investigated and recorded. Once they’re handled, the remaining difference should be zero. If it isn’t, keep looking.

How to reconcile one account

  1. Start with the official statement. Note its beginning date, ending date, and ending balance.
  2. Confirm the opening point. Last month’s reconciled ending balance should lead into this month.
  3. Match cleared deposits and withdrawals. Match by amount and date, but also check the payee or description.
  4. Record legitimate missing items. Common examples are bank fees, interest, automatic subscriptions, refunds, or bounced payments.
  5. List timing differences. Outstanding checks and deposits in transit should be identifiable transactions, not a vague “reconciliation adjustment.”.
  6. Investigate duplicates and surprises. Check whether a duplicated bank-feed item was added instead of matched, or whether an unfamiliar withdrawal needs to be reported to the bank.
  7. Save the reconciliation. Keep the statement, reconciliation report, and notes supporting unusual items. The IRS says the recordkeeping system can be any system that clearly shows income and expenses. So consistency and a usable trail matter more than a particular app (IRS recordkeeping guidance).

Xero’s bank reconciliation walkthrough describes the same basic comparison of bank records and business records. Its page is useful as a process example, but your own software’s buttons may differ.

How often is often enough?

Monthly is the minimum sensible routine for a small, low-volume business. Finish it soon after the statement closes, while you still remember unusual purchases.

Weekly is useful when you have many transactions, several processor payouts, a low cash cushion, or frequent refunds. A short weekly match makes month-end much less painful.

Daily review is different from reconciliation. Looking at the bank app can catch fraud or low cash, but it doesn’t prove the books are complete.

Reconcile processor balances too. Stripe, PayPal, Square, and marketplaces can hold money between the customer payment and bank payout. Treating the deposit as the sale can hide gross revenue, fees, refunds, disputes, and money still held by the platform.

Red flags worth stopping for

Don’t plug a mystery difference into “miscellaneous expense.” Investigate if the opening balance changed, an old outstanding check disappears without clearing, a transaction has been manually altered after reconciliation, or the same deposit appears twice.

If a previously reported period is wrong, preserve the original trail and ask a bookkeeper, accountant, or tax professional how to correct it. Tax and recordkeeping requirements vary, so check the rules that apply where you live and operate.

Sources and further reading

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Helpful WAHMN tool

Use the Income & Expense Tracker to compare your recorded transactions with the bank statement during reconciliation.

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Related WAHMN resource

If you want to test the numbers with your own prices and costs, the calculator gives you a practical place to work them out. See WAHMN Financial Calculator.

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