What Is Bookkeeping? A Small Business Guide
From Tax Guide.
Tax Guide · Arab, Alabama
Bank Reconciliation Made Simple: Why Your Books Do Not Match the Bank
A bank reconciliation compares your books to your bank statement, line by line. Here is how it works and what to check when the two do not match.
The short answer
What is a bank reconciliation?
A bank reconciliation is a comparison of your own bookkeeping records with your bank statement to make sure both tell the same story about your money.
Your books show what you believe happened: checks you wrote, deposits you made, card payments you recorded. The bank statement shows what the bank has actually processed. The two rarely agree on any given day, and that is normal.
Reconciling means going through both lists, matching each item, and explaining every difference. When you finish, the ending balance in your books and the ending balance at the bank should agree once the known differences are accounted for.
It is one of the most useful habits in bookkeeping, because it catches mistakes while they are small and easy to fix.
Why it matters
Why do my books not match my bank balance?
Books and bank balances usually differ because of timing, because something was recorded twice or not at all, or because of a keying error.
Most differences are harmless timing. A check you wrote last week may not have cleared yet, or a deposit you made late in the day may not post until the next business day. Those items fix themselves once the bank catches up.
The differences worth chasing are the ones that never clear on their own. Those point to something that needs attention, such as a missed entry or a charge you did not expect.
- Outstanding checks: written and recorded in your books, but not yet cashed.
- Deposits in transit: recorded in your books, but not yet posted by the bank.
- Bank fees and interest: the bank added them, but you have not recorded them yet.
- Transposed numbers: a payment entered as 54 when it was 45 throws the balance off by an amount that divides evenly by nine.
- Duplicates or omissions: an entry made twice, or a transaction left out entirely.
- Unrecognized charges: a payment you do not remember, which may be an error or something worth reporting to your bank.
Step by step
How do I reconcile a bank statement?
You reconcile a bank statement by starting from the bank balance, adjusting for timing items, and comparing the result with your books.
The steps are the same whether you use a paper ledger or bookkeeping software. Work from the statement for a single month, and work in order so nothing gets skipped.
If you get stuck, do not force the numbers to agree by adding a mystery entry. A forced balance hides the problem, and it tends to come back larger the next month.
- Start with the statement ending balance for the period.
- Add deposits that are in your books but not yet on the statement.
- Subtract checks and payments that are in your books but have not cleared.
- Compare the result with the ending balance in your books.
- Record any bank fees, interest or automatic payments that appear on the statement but not in your books.
- Investigate anything left over before moving on.
A worked comparison
What items do I compare, and where do they show up?
Each kind of reconciling item lives on one side or the other, and knowing which side tells you what to do about it.
The table below shows where common differences appear and what usually follows. It is general, and your own accounts may have more than these.
| Item | Shows in your books | Shows at the bank | What to do |
|---|---|---|---|
| Outstanding check | Yes | Not yet | Wait for it to clear; follow up if it stays open a long time |
| Deposit in transit | Yes | Not yet | Confirm it posts on the next statement |
| Bank service fee | No | Yes | Record it in your books |
| Interest earned | No | Yes | Record it in your books |
| Duplicate entry | Yes, twice | Once | Delete the extra entry |
| Unknown charge | No | Yes | Find out what it is; contact the bank if needed |
Interest earned may be reportable income, so it belongs in your records.
Good habits
How often should I reconcile my accounts?
Most small businesses reconcile every account once a month, right after the statement arrives.
A monthly rhythm keeps the list of items to match short, and it means an error is only a few weeks old when you find it. Waiting a full year turns a one-hour job into a long project, which is how many owners end up needing a bookkeeping cleanup.
Reconcile every account, not only the main checking account. Savings, credit cards, payroll accounts and any account that touches the business can hide problems. Keeping business and personal money in separate accounts makes the whole process much easier, as covered in our guide to receipts and expense tracking.
Keep the finished reconciliation with your records. If an agency ever asks how your books were built, a signed and dated reconciliation shows the numbers were checked. Our guide on how long to keep tax records explains how long to hold on to them.
Year end and taxes
How does bank reconciliation help at tax time?
A clean reconciliation means the income and expenses on your return come from numbers that have already been checked against the bank.
When books and bank records agree, your preparer can work from totals you can trust. Deposits are matched to sales, payments are matched to bills, and nothing sits in an account waiting to be explained. That saves time in a busy season and lowers the chance of a mistake going onto a return.
It also helps when a question comes up later. If a notice asks about a deposit or a deduction, a reconciled account lets you trace it quickly. Our guide to what to do when you receive an IRS notice explains why organized records make responding easier.
- Reconcile the final month of the year before handing records to your preparer.
- Note any deposits that are not sales, such as loans or owner contributions, so they are not counted as income by mistake.
- Keep the year-end statements with your tax records.
How we can help
Need help reconciling your accounts?
Melton Tax Services can help through our payroll and bookkeeping service.
If your books and your bank do not agree and you are not sure where the gap comes from, we can look at the records with you, explain what we find, and set up a routine that keeps them matched going forward.
We serve Arab and the surrounding area. Call our office at 256-586-4635 or use the contact page to get started. Please do not send account numbers or Social Security numbers through the website; bring them in or call us instead.
Answers
Questions about bank reconciliation
What if my reconciliation is off by a small amount?
Small differences still have a cause, so look for a transposed number or a missed fee first. It is better to find and fix it than to write it off as a rounding difference, because a habit of ignoring small gaps makes real errors easy to miss.
Do I need software to reconcile a bank account?
No. A paper ledger and a calculator work fine for a simple account. Software can match items automatically, but you still have to review the result, since the software only knows what was entered.
What is an outstanding check?
An outstanding check is one you wrote and recorded but that the bank has not yet paid. It is a timing difference, and it should clear in a later statement. A check that never clears may have been lost and may need to be reissued.
Should I reconcile credit card accounts too?
Yes. A credit card statement is compared with your books the same way a bank statement is. Charges, payments, fees and interest should all match what you recorded.
What if I find a charge I do not recognize?
Check your receipts and ask anyone else with access to the account first. If it is still unexplained, contact your bank promptly. Unrecognized charges can be a sign of fraud or a billing error.
Can a reconciliation help at tax time?
It can. Books that agree with the bank statements are far easier to turn into an accurate tax return, and they give your preparer numbers they can rely on.
How long does a reconciliation take?
A well-kept account for one month can take a short session. A neglected account takes longer, because each unmatched item has to be traced back.
Who should reconcile the accounts?
Ideally, someone other than the person who writes the checks or handles the deposits. A second set of eyes makes errors and misuse easier to catch.
Read next
Related reading
Behind on Bookkeeping? How to Catch Up
From Tax Guide.
How to Track Business Expenses and Receipts
From Tax Guide.
Payroll and Bookkeeping
A service Melton Tax Services provides.
Melton Tax Services
Questions about your taxes or your business?
Our team in Arab is just a phone call away, and we are glad to talk it through with you.