What bank reconciliation means and why businesses do it

Bank reconciliation is a comparison. You set your own record of the bank account beside the bank's record, and you check that they agree.

Wiise's help describes it as the process to confirm that all the transactions in your bank accounts are recorded in your business accounting records¹.

The two sides

• Your side. The balance of the bank account inside your accounting software, built from what you've recorded: sales, bills, payments, transfers.
• The bank's side. The most recent bank statement. That's an official summary of the transactions in a given period².

In bookkeeping terms, the balance in your books is reconciled to the balance reported by the bank in its most recent statement³. After that, any difference needs to be examined and, if appropriate, fixed³.

What should agree

The ending balance on the statement and the balance in your books for the same date. Not every line has to match on the day. Some gaps are just timing, and they're explained rather than fixed. The next section covers them.

Why the two sides drift apart

One reference lists three main reasons³:

• Differences due to timing in recording entries.
• Transactions recorded by the bank but not by the account holder.
• Errors in recording entries.

A cheque you've written but the payee hasn't banked yet is the classic timing example. A bank fee you haven't entered is a bank-only item. A payment typed in twice is an error.

Why businesses bother

You catch mistakes while they're small. You also spot payments you don't recognise. The bank isn't the only one who can be wrong, though. The statement, once issued, isn't normally changed, and any error found would normally be corrected on a future statement². So the fix often sits in your books.

Reconciling often keeps the job small. The same reference says it's good practice to reconcile at reasonably frequent intervals³. How often suits your business is up to you and your accountant.

A small picture of it

Say your software shows a balance for the bank account, and the statement shows a different one. Neither number is "the truth" until you've looked at the lines behind them. You compare line by line, tick off the ones that agree, and list the ones that don't. Each leftover line gets a reason: not banked yet, not recorded yet, or entered wrongly.

When every leftover has a reason and the books are adjusted, the two sides agree.

What it isn't

It isn't a tax return or an audit. Reconciling shows your books and the bank agree. It doesn't tell you what's deductible or what you owe. For that, ask your accountant or your tax authority.

For how the job runs in practice, read Reconciling a month step by step. If your software offers a feed, what a bank feed is explains where the bank's lines come from.