Bank reconciliation means checking that the cash balance in your books agrees with the balance on your bank statement — and explaining every difference. It is the single most important control in small business bookkeeping, because if cash is wrong, every other number is in doubt.
Why it matters
- It catches missing, duplicated and wrongly dated entries.
- It surfaces bank charges, interest and payments you didn’t know about.
- It is the first thing an auditor, lender or tax advisor checks.
- It makes fraud and errors visible while they are still small.
How to reconcile a bank account, step by step
- Get the statement. Use the official bank statement for the period, not just the live bank feed.
- Start from agreed balances. The opening balance in your books should equal the closing balance of the last reconciled period. If it doesn’t, fix that first.
- Match each line. Tick every statement line against an entry in your ledger — amount, date and payee.
- List what doesn’t match. Unmatched items go on a list: on the statement but not in the books, or in the books but not on the statement.
- Investigate each difference. Decide whether it is a timing difference, a missing entry or an error.
- Correct the books. Record missing entries and fix errors. Leave genuine timing differences as reconciling items.
- Prove it. Statement balance, plus deposits in transit, minus unpresented payments, should equal the ledger balance exactly.
- Keep a record. Save a reconciliation report for the period so the next one starts from a known position.
The most common reasons balances don’t match
| Difference | What it is | What to do |
|---|---|---|
| Timing | A cheque or transfer recorded in your books that hasn’t cleared the bank yet. | Leave it as a reconciling item; it should clear next period. |
| Bank charges & interest | Fees or interest on the statement that nobody recorded. | Record them in the books. |
| Duplicates | The same transaction recorded twice — often from a bank feed plus a manual entry. | Delete the duplicate. |
| Net payouts | Stripe, PayPal, Shopify or Amazon deposits that are sales minus fees and refunds. | Record gross sales and fees separately, then match the net deposit. |
| Errors | Wrong amounts, transposed digits or entries posted to the wrong account. | Correct the entry. |
A quick example
Your bank statement shows 18,204.60 at month-end; your books show 18,535.50 — a difference of 330.90. Matching line by line finds a software subscription of 312.40 and a bank fee of 18.50 on the statement that were never recorded. Record both, and the books agree with the bank to the cent.
How often should you reconcile?
At least monthly, for every bank account, credit card and payment platform. Weekly is better if you have high volumes — most e-commerce sellers fall into this group — because a difference found a week later takes minutes to fix, while one found a year later can take days.
Signs your reconciliations need attention
- The same unexplained items get carried forward month after month
- There is a suspense or “ask my accountant” account with a growing balance
- Your software shows hundreds of unreconciled bank lines
- Your tax advisor or auditor keeps asking about cash
If any of these sound familiar, a one-off reconciliation clean-up followed by a monthly routine usually fixes the problem for good.