To reconcile a business bank account, you or your accountant will compare the recorded transactions to the bank statements. You’ll also adjust for uncashed checks and interest earned, flagging any missing or unfamiliar transactions for further review.
Reconciling your bank account monthly ensures you’ve correctly accounted for all transactions. This is also the best way to catch and correct any missed or potentially fraudulent transactions.
Reconciling a business bank account is the process of checking recorded transactions against those reflected on bank statements. From there, you’ll note which transactions aren’t reflected in both records.
By following this process, you can ensure that you have an accurate accounting of all your business’s transactions and that none have been entered inaccurately. You can also detect fraud early so you can alert your bank and resolve discrepancies.
Regularly reconciling your business bank account is the fastest way to detect any fraudulent activity. You or your accountant or bookkeeper will flag for review any transactions that appear on your statement of account activity that aren’t included in your internal accounting.
Reconciliation also helps ensure your bank balance matches your company’s internal records. You can identify any payments that may have been lost or sent to the wrong payee, and make sure that you don’t accidentally overdraw your account.
If you don’t regularly reconcile your business bank account with your internal records, you could easily miss fraudulent transactions in your account. You might also lose payments to vendors or have bills sent to collections, which can hurt your credit.
You also may accidentally overdraw your account and get hit with fees from your financial institution. You could even miss out on tax deductions and end up paying more in taxes than you owe.
To reconcile your business’s bank account, you need to review your account activity statements from your financial institution(s). You then need to compare the transactions reflected on your statements to your company’s internal accounting.
You may need to make adjustments for payments that haven’t cleared yet, like uncashed checks, and interest earned on your account(s). Flag any transactions you don’t recognize for further review.
Here are these steps in greater detail:
The first thing to do when reconciling your accounts is to gather account statements for the periods and accounts you’re reconciling. Check each of the deposits, withdrawals and payments listed on each statement, taking note of any transactions you don’t recognize. Also, note your ending balance so that you can check it against your own accounting later.
Once you’ve reviewed the account activity recorded by your bank during the reconciliation period, compare the transactions listed on your statements to your own records. Make sure all transactions appear in your records and on your bank statements in the same amounts.
Take special note of any that don’t match or that you don’t recognize. You may have a few transactions (both debits and credits) that don’t match up and require some adjustments.
If you regularly send payments by check for your business, chances are you’ve sent a few checks that haven’t been cashed yet, so they won’t be reflected in your bank records. This means you may have recorded quite a few transactions that aren’t included in your bank statement or reflected in your final balance.
In other words, your bank statement may show “available” funds that could disappear any day when payees cash your checks. For purposes of account reconciliation, you’ll need to adjust your records by adding back the value of any uncashed checks or subtracting the value of any deposits that haven’t cleared yet.
If you have payments that have been outstanding for more than 30 days, you may want to contact those payees to confirm their contact details and that they actually received your payment. Otherwise, they may send your payment to collections.
Before moving on, you may also need to adjust for interest income and other debits or credits that appear in your bank statement but not in your internal records. However, you should limit your adjustments to transactions that you can confirm easily with your bank. Here are some typical adjustments:
If you notice any of these types of transactions on your statement, you should confirm them with your bank and adjust as necessary by entering transactions in your records to match your statement.
Once you’ve adjusted for uncashed checks and easily confirmable debits or credits on your bank statement, check any other transactions that don’t match up. In some cases, transactions may appear on your bank statement that you simply forgot to record.
Other times, your bank may have made a mistake by crediting your account instead of another customer’s. In a worst-case scenario, your account may have been impacted by fraud.
Some banks will reverse fraudulent transactions if they’re caught early enough, which is why it’s important to reconcile your accounts early and often.
To reconcile unusual transactions, you may need to check your prior records to see if any transactions on your statement are from payments you issued before the current reconciliation period. You may also need to check other accounting records – such as vendor invoices – to see if you simply forgot to enter a transaction in your bookkeeping software.
In this case, you’ll need to enter those transactions now to correct your internal records. You can enter the transaction in the current month, rather than trying to recall when payment was actually issued.
If, after reviewing your records, you can find no indication that you simply forgot to enter the transaction, you should contact your bank to get more details about the transaction, including copies of canceled checks or bank transfer details.
You can use these details to try to confirm whether it was a payment you actually intended to send and just failed to note. If you still don’t recognize the payee or the specific transaction, contact your bank’s fraud department right away.
Not all companies use double-entry accounting, even though it’s a common feature of accounting software. If you use this type of accounting for your business, when reconciling your bank account, you should use this as an opportunity to reconcile your other accounts as well.
This process is a bit more complicated, but once you reconcile all of your internal transaction records, it basically involves ensuring each individual transaction is broken down properly in your books. Each transaction should be reflected at least twice in your internal records: once in a cash account and once as a credit or debit to a liability or equity income.
By using dual-entry accounting and reconciling your transactions across all your accounts, you can see updated amounts of outstanding debts as well as the net value of your business at the end of each accounting period.
Most business owners reconcile their bank accounts at least monthly, which is the general recommendation. However, with modern accounting software, you can monitor your bank accounts constantly and know at any given time exactly which transactions have cleared and which are outstanding.
The software can also send you instant notifications if a transaction clears in your account that you haven’t entered in your records. That way, you can take immediate steps to resolve any accounting mistakes.
With these capabilities, there’s no reason not to make reconciliation a regular bookkeeping practice for your business. Use the monthly account reconciliation as a time to review your company’s transactions for ways to save money or improve your operations.
If the balance on your bank account statement doesn’t match the balance in your records, it could be for a number of reasons. Most often, it’s a result of bank fees that the bank doesn’t notify you about until your statement comes, or it’s an internal mistake.
For example, this could be caused by transactions that were not entered or were put in incorrectly. What you should do in response depends on the nature of the error and the risk to your business.
These are some of the most common factors that throw off a reconciliation and how to deal with them:
Top accounting software is the best way to automate the bank reconciliation process. You can use accounting software to track your transactions, send invoices, generate reports and monitor inventory levels.
The right accounting software is affordable, easy-to-use and integrates seamlessly with other tools you use for your business. Here are the best options for different types of businesses:
Jamie Johnson contributed to this article.