Bank reconciliation is one of the most important habits in small business bookkeeping — and one of the most skipped. This guide explains what it is, why it matters, and how to do it every month.
What is bank reconciliation?
Bank reconciliation is the process of comparing your accounting records to your actual bank statement to make sure they match.
At the end of every month, your bank statement shows exactly what moved through your account. Your accounting software shows what you've recorded. Reconciliation checks that both tell the same story.
If there's a difference, you have an error somewhere. Maybe a transaction was entered twice. Maybe a check cleared but wasn't recorded. Maybe there's a bank fee you didn't know about. Reconciliation catches all of it.
Why reconciliation matters
Four reasons to reconcile every month:
Catch errors early: Small mistakes compound over time. A duplicate transaction in January becomes a big discrepancy by December.
Detect fraud: Unauthorized transactions show up in reconciliation. Monthly reconciliation means you catch fraud within 30 days, not a year later.
Accurate financial reports: Your P&L and balance sheet are only as accurate as your transaction records. If your records don't match your bank, your reports are wrong.
Tax preparation: Your accountant will reconcile your books at tax time anyway. Doing it monthly yourself means there are no surprises.
What you need before you start
Three things:
- Your bank statement for the period (download it from your online banking)
- Access to your accounting software
- The ending balance from your last reconciliation
Set aside 20-30 minutes. If your books are current, this shouldn't take long.
Step-by-step reconciliation process
Step 1: Get your bank statement ending balance. This is the balance shown at the end of the statement period.
Step 2: Get your book balance. This is the balance in your accounting software for the same account on the same date.
Step 3: Compare the two. If they match, you're done. If they don't, work through the following steps.
Step 4: Check for outstanding transactions. Look for checks or payments you've recorded that haven't cleared the bank yet. Add these back to your book balance.
Step 5: Check for bank items not in your books. Look for bank fees, interest charges, or deposits on your bank statement that you haven't recorded yet. Add these to your books.
Step 6: Investigate remaining differences. Any remaining difference is an error. Common causes: duplicate transactions, wrong amounts, or transactions in the wrong period.
Step 7: Adjust and reconcile. Once everything matches, mark the reconciliation complete in your accounting software.
Common differences and how to handle them
Outstanding checks: Checks you've issued that haven't cleared yet. Normal. They'll clear in the next period.
Deposits in transit: Payments you've received and recorded but that haven't hit your bank yet. Also normal.
Bank fees: Service charges, wire fees, overdraft fees. Record them in your books as bank fees expense.
Interest income: If your account earns interest, record it as interest income.
Errors: Wrong amounts, duplicate entries, or transactions posted to the wrong account. Fix them in your accounting software.
How often should you reconcile?
Monthly at minimum. At the end of every month, reconcile every bank account and credit card your business uses.
For high-volume businesses or businesses with tight cash flow, weekly reconciliation makes sense.
Never let reconciliation go more than 30 days. The longer you wait, the more time it takes and the harder it is to track down errors.