How to Reconcile a Business Bank Account

What is bank reconciliation?

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.

“While reconciliation sounds boring, it’s a way to confirm that every line item — deposit, withdrawal, or fee — is reflected in the company’s books and matches what the bank has recorded for money in and out of your account,” said Christopher Naghibi, executive vice president and chief operating officer at First Foundation Bank.

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. 

How to reconcile a bank account

To reconcile your business’s bank accounts, you need to review your account activity statements from your financial institutions. 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, such as uncashed checks and interest earned on your accounts. Flag any transactions you don’t recognize for further review.

Using a top accounting software is the ideal way to automate the bank reconciliation process. You can use the platforms to track your transactions, send invoices, generate reports, and monitor inventory levels.

“This isn’t the 1940s and you should not be planning to use a general ledger on paper,” Naghibi said. “If you have to rely on Excel templates, that’s fine, but you are making your life more complicated than it has to be. Accounting software with bank feed integration can and does automate much of the work, significantly reducing manual effort and saving time.”

Below are more details on the steps to reconcile your business’s bank accounts.

1. Review your account statement.

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 you can check it against your own accounting later.

2. Compare statements to internal accounting records.

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.

3. Adjust for uncashed checks.

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. That 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.

4. Record interest income and other credits.

Before moving on, you may also need to adjust for interest income and other debits or credits that appear on your bank statement but not in your internal records. However, you should limit your adjustments to transactions you can confirm easily with your bank. Here are some typical adjustments:

• Interest earned on your account
• Bank fees you may not get alerts about until the statement comes (such as paper statement fees)
• Overdraft or late-payment fees
• Wire transfer fees
• Bank fee reversals

If you notice any of those 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.

5. Review any other discrepancies.

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.

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 those 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.

6. Reconcile your checking account with other accounts.

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, you should use reconciling your bank account as an opportunity to reconcile your other accounts as well.

The process is a bit more complicated, but once you reconcile all 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.

Why is reconciling your bank account important?

No matter your industry or offerings, it’s essential to reconcile your business bank account. By doing so, you can:

• Detect fraud. 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.
• Ensure accuracy. Reconciliation also helps ensure your bank balance matches your company’s internal records. “It’s a safeguard that helps uncover fraud, spot accounting errors, and keep cash flow on track, all of which are clearly vital parts of running any business,” Naghibi said.
• Save money. If you don’t reconcile your account, you may accidentally overdraw it 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.
• Maintain a good credit score. Reconciliation is an easy way to keep your credit in tip-top shape, because it can help you prevent lost payments to vendors and bills that get sent to collections.
• Simplify tax season. Tax season can be daunting for your business, but reconciliation can make it easier. “Come tax season, your accountant will be happy that you or your bookkeeper managed to balance your books in such a way that these issues are not a problem,” Naghibi said. “From experience, I can tell you that doing this no less than monthly will save you a lot of heartache when it comes time to pay your taxes.”

How often should you reconcile bank accounts?

Most business owners reconcile their bank accounts at least monthly, which is the general recommendation. With modern accounting software, however, you can monitor your bank accounts constantly and know at any 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 possible, get a good software, hire a bookkeeper, and automate as much of the data input as you can by linking it to your point-of-sale devices,” Naghibi said. “That is about 90 percent of what you need to do for most businesses. Then all you need to do is log in once a month or once a day, depending on the nature of your venture, and give it a quick once over to ensure that things are operating as they should be.”

What happens if bank reconciliation doesn’t balance?

If the balance on your bank account statement doesn’t match the balance in your records, it could be for a number of reasons. Typically it’s a result of bank fees the bank doesn’t notify you about until your statement comes, or it’s an internal mistake. 

It could, for example, be caused by transactions that were not entered or were input incorrectly. What you should do in response depends on the nature of the error and the risk to your business.

Below are some of the most common factors that throw off a reconciliation and how to deal with them.

• Uncashed checks: You may need to remind payees to cash your checks.
• Bad payee info: Double-check that you have the payee’s correct address and other accurate details.
• Missed deposit: Confirm the deposit with your bank.
• Incorrectly recorded transaction: Check your records (copies of invoices or canceled checks) to verify the transaction details.
• Fraudulent transactions: Get transaction details from your bank or alert its fraud department.

Anna Baluch contributed to this article.