Handbook / Bookkeeping and cash

How to reconcile a bank statement for your small business

Your bank statement shows what actually happened in your account. Your books show what you recorded. Reconciling the two, regularly, is one of the most important bookkeeping habits: it catches errors, missing income, duplicate payments, unexpected fees and even fraud while they are still easy to fix.

Why reconciliation matters

• Accurate records: your profit and loss and tax figures depend on complete income and expense records. The IRS says your records must support the items on your return.
• Catch mistakes: duplicate entries, wrong amounts or missing transactions.
• Spot fraud: unfamiliar payments may mean someone has your card or account details.
• Know your real cash: your book balance can differ from the bank balance because of uncleared items.

What you need

• your bank statement for the period
• your bookkeeping records: software, spreadsheet or ledger
• last period's reconciliation, if you have one
• receipts and invoices for any unclear items

Step by step

1. Check opening balances. Your books and the statement should start from the same reconciled balance as last period. If not, fix last period first.
2. Match deposits. Tick off each deposit on the statement against income recorded in your books.
3. Match payments. Tick off each withdrawal, card payment, transfer and cheque.
4. List bank-only items. Things on the statement but not in your books, such as bank fees, interest, automatic payments or payments you forgot to record.
5. List book-only items. Things in your books but not yet on the statement, such as cheques not yet cashed or deposits in transit.
6. Update your books. Record missing bank-only items with supporting documents, and correct errors.
7. Compare balances. Your adjusted book balance, after updates, should equal the statement's ending balance once you account for timing differences.
8. Save the reconciliation. Keep the report and notes with the statement.

Timing differences

Some differences are normal and resolve themselves:

• outstanding payments: cheques written or transfers scheduled that have not cleared
• deposits in transit: money recorded in your books but not yet showing in the bank

Note these on your reconciliation and check that they clear next period. Items that stay uncleared for months need investigating.

Common problems and fixes

• Duplicate entries: often from importing transactions and entering them manually. Delete the duplicate.
• Wrong amounts: typing errors, such as reversed digits. Correct the entry.
• Missing income: a deposit not recorded or matched to an invoice. Record it and mark the invoice paid.
• Personal transactions: personal spending from the business account. Record as an owner's draw, and keep accounts separate in future.
• Payment processor deposits: processors may deposit totals net of fees. Record the gross sales and the fees separately so income is not understated.

Unrecognised transactions

If you see a payment you do not recognise, check receipts and with anyone who uses the account. If it still looks wrong, contact your bank promptly. Banks have procedures for reporting errors and unauthorised transactions, and deadlines can apply, so act quickly. Protections for business accounts can differ from those for personal accounts, so read your account agreement and know how to report problems before you need to.

Using software

Accounting software can import bank transactions and suggest matches, which saves time. You still need to review each match, record anything missing and confirm the balances agree. Do not simply accept every suggestion.

Make it a monthly habit

Set a date each month, such as a few days after statements arrive, and block an hour. Reconcile every business account and credit card. Monthly reconciliation keeps the job small; leaving it for a year turns it into a project. See bookkeeping for the self-employed.

Keep records

Keep statements, reconciliation reports and notes as part of your business records, for the periods described in how long to keep records.

Credit cards and payment apps

Reconcile business credit cards, payment processors and payment apps in the same way as bank accounts. Match each charge or payout to your records, and record processor fees and refunds. Transfers between your own accounts, such as a processor payout into your bank account, should be recorded as transfers rather than as new income, or your income will be counted twice. A short checklist of every account to reconcile each month helps you avoid missing one.

Compare your books with the bank statement every month, match each transaction, record fees and missing items, note timing differences, fix errors, investigate unknown payments promptly and keep the reconciliation with your records.