Reconciliation is the process of matching the transactions in your books to the transactions on your bank and credit card statements. It sounds routine, and it is. That is exactly why it works: done every month, it catches missing transactions, duplicates, bank errors and fraud while they are still easy to fix.

Why reconciliation matters

Your financial statements are only as reliable as the transactions behind them. The U.S. Small Business Administration's guidance on managing your finances describes the balance sheet as a foundation of your business's financial picture. A balance sheet built on unreconciled accounts can show cash you do not have or debts you have already paid.

Reconciled accounts also make tax preparation faster. The IRS explains in its recordkeeping guidance that records help you prepare financial statements and support the items on your return. Reconciliation is how you know those records are complete.

What you need before you start

  • The bank or credit card statement for the month, showing the beginning and ending balance.
  • Access to your accounting software, with the month's transactions imported or entered.
  • Supporting documents for anything unusual, such as receipts or invoices.
  • Last month's reconciliation report, so you know which items were outstanding.

The step-by-step process

1. Confirm the beginning balance

The beginning balance in your books should equal the ending balance of last month's reconciliation. If it does not, something from a prior period was changed after it was reconciled. Find that change before going further, or every later month will be off.

2. Match deposits

Work through each deposit on the statement and tick it off against a deposit in your books. Watch for deposits that combine several customer payments, and for payment processors that deposit net of fees. The fees should be recorded as an expense rather than ignored.

3. Match withdrawals and charges

Do the same for checks, card charges, transfers and bank fees. Bank fees and interest often appear only on the statement, so record them in your books as you find them.

4. Identify outstanding items

Some transactions are in your books but have not cleared the bank yet, such as a check you mailed at month end. These are timing differences and are normal. List them on the reconciliation and make sure they clear next month.

5. Investigate true differences

Anything left over is a real difference. Common causes include a transaction entered twice, a transaction never entered, an amount typed incorrectly, a transfer recorded in only one account, or a personal charge on the business card. Fix the books, not the statement, unless the bank actually made an error.

6. Finish and save the report

When the adjusted balances agree, complete the reconciliation in your software and save the report with the statement. Those two documents together are part of your supporting records.

Credit cards, loans and payment platforms

Reconcile every account that has a statement, not only checking. That includes business credit cards, loans, lines of credit and payment platforms that hold a balance. Loan statements are especially important because they separate interest, which is usually an expense, from principal, which reduces the liability.

How often should you reconcile?

Monthly is the standard for most small businesses, timed to each statement. Higher-volume businesses, such as online stores or restaurants, often reconcile weekly. See our guides for ecommerce and restaurant bookkeeping for industry-specific tips.

Signs your reconciliations need attention

  • The beginning balance keeps changing.
  • There are outstanding items several months old.
  • You have an "uncategorized" or "ask my accountant" balance that keeps growing.
  • Your cash balance in the books does not resemble what is in the bank.

Let us handle it

Monthly reconciliation is a core part of our bookkeeping services. If your accounts have not been reconciled in a while, we can catch them up first. Book a free consultation and we will review where things stand. For more on what to keep, read what business records to keep.