Bank reconciliation is one of those bookkeeping tasks that often gets pushed to the bottom of the list. It feels routine, there is rarely anything exciting about it, and when the business gets busy, it can seem like something that can wait until later.
But bank reconciliation is one of the basic controls that keeps your financial records accurate. It is worth doing every month, without exception.
What does bank reconciliation actually do?
Bank reconciliation simply means comparing the transactions recorded in your accounting system with the transactions that actually went through your bank account.
You go through the transactions, match them, investigate anything that doesn’t agree, and make the necessary corrections.
It sounds straightforward, but this simple process can uncover problems that might otherwise remain hidden for months.
What happens when you skip it?
The first problem is that small errors can become big problems. A missed transaction in January might take five minutes to identify and correct. If you discover it six months later, you may have to go through hundreds of transactions to work out what happened.
There is also a risk of fraud or unauthorized transactions going unnoticed. Regular reconciliation provides a simple way of identifying payments, withdrawals or transfers that shouldn’t have happened.
Your financial reports can also become unreliable. If the accounting records don’t accurately reflect what has happened in the bank account, then the profit and loss, balance sheet and cash flow figures based on those records may also be wrong.
Bank reconciliation can also pick up things that are easy to overlook, such as:
- Bank charges and transaction fees
- Foreign exchange or other bank-related charges
- Duplicate payments
- Direct debits or standing orders
- Transactions that were recorded incorrectly
- Payments that were made but never entered into the accounting system
These may seem like small items individually, but they add up over time.
Tax and audit work can also become more difficult when accounts haven’t been reconciled. Instead of having clean records that can be relied upon, the business may have to spend significant time explaining and correcting discrepancies before the numbers can be used.
Why monthly rather than quarterly or annually?
The longer you wait, the harder reconciliation becomes.
When you reconcile a transaction within a few weeks, you can usually remember what the payment was for, who made it, and why it was received. If you wait six or twelve months, that same transaction may require emails, invoices, receipts and other records just to work out what happened.
There is also a compounding effect. An unreconciled issue doesn’t disappear at the end of the month. It carries forward into the next month and can make future reconciliation more difficult.
Monthly reconciliation keeps the workload manageable. Instead of eventually facing a large cleanup exercise, you deal with small differences while they are still easy to understand and correct.
What does good reconciliation actually look like?
Good reconciliation is more than checking whether the closing bank balance matches the balance in your accounting system.
A proper reconciliation should involve:
- Matching the transactions in the accounting records with the bank statement.
- Investigating transactions that don’t match.
- Correcting errors rather than simply forcing the balances to agree.
- Identifying missing transactions, duplicate entries and unusual payments.
- Keeping supporting documentation where necessary.
- Completing and reviewing the reconciliation regularly.
The objective isn’t simply to make two numbers agree. The objective is to understand why they agree and to make sure the accounting records accurately reflect what happened in the bank account.
Bank reconciliation may not be the most exciting part of running a business, but it is one of the simplest ways to maintain confidence in your financial numbers. A few hours spent keeping the accounts reconciled each month can save days of investigation and cleanup later.
