How to do a bank reconciliation

business.gov.au defines a bank reconciliation as a cross-check that the amounts in your cash book match the relevant bank statements. In accounting software, the cash book is the bank account register: the transactions you have entered or imported for that account.

When the reconciliation is finished, every difference between the two has been explained or corrected, and the balance in your books agrees with the bank's balance once uncleared items are allowed for.

A bank reconciliation is what tells you the bank balance in your books is real. The profit and loss, the balance sheet and any cash flow forecast all rest on the bank transactions being complete and correct, so an account left unreconciled can make each of them wrong without any sign that something is missing.

Along the way, it helps you:

• spot a payment you didn't authorise, or a direct debit still running after you cancelled the service
• find a customer payment that arrived but was never matched to its invoice, before the customer is chased for money they have paid
• notice a supplier bill paid twice while it is still easy to ask for the money back
• pick up a bank error early, while the transaction is recent and easier to query with the bank

The longer an account goes without one, the harder each difference is to trace, because the receipts, people and memories behind it are further away.

• The bank statement for the period, with its closing balance.
• Your cash book or the bank account register in your accounting software, up to the same date.
• The closing balance from your last reconciliation, which should equal this period's opening balance.

1. Work through the statement line by line and find each deposit and payment in your books.
2. Mark each one as matched on both sides. Accounting software usually suggests matches for imported bank transactions; check each suggestion before you accept it.
3. List anything on the statement that is not in your books, such as bank fees, interest or a direct debit you have not recorded.
4. List anything in your books that is not on the statement yet, such as a deposit made on the last day of the period.

Each unmatched item belongs to one of a few groups, and each group is dealt with differently.

• Timing: a deposit or payment recorded in your books that the bank has not processed yet. Leave it, and check it clears in the next period.
• Missing entries: bank fees, interest and automatic payments that are on the statement but not in your books. Record them.
• Errors in your books: an amount entered wrongly, a transaction entered twice, or one posted to the wrong account. Correct the entry and keep the document that supports the correction.
• Bank errors: a transaction the bank has recorded wrongly, such as the wrong amount or a payment that is not yours. Don't change a correct entry in your books to match it. Raise it with the bank and keep it as a reconciling item until the bank corrects it.
• Personal transactions in a shared account: business.gov.au says that if you use one account for personal and business banking, you must clearly identify any personal payments or expenses in your cash book.

Start from the bank statement's closing balance, add deposits that are in your books but not yet on the statement, take away payments that are in your books but have not yet cleared, and adjust for any bank error you have raised with the bank. The result should equal the balance in your books.

If the figures don't agree, the difference is an item you have not found yet. Don't force the balances to agree with an adjusting entry: an unexplained difference often hides an error that will show up again.

A bank reconciliation statement sets out both sides on one page: the bank's balance, adjusted for items that haven't cleared, and the balance in your books, adjusted for items you haven't recorded yet or recorded wrongly. When the two adjusted figures agree, the account is reconciled. The example below has more in it than the one above.

First, the bank side. Start with the statement's closing balance of 8,742.50. Add the takings banked late on 31 March, which the bank credited the next day: the money has been banked, but the statement doesn't show it yet. Take away cheque 412, which the supplier hasn't presented, and the transfer the bank processed on 1 April. The adjusted bank balance, 9,417.50, is what the statement would have shown at 31 March if all three items had already cleared.

Next, the book side. The books showed 10,200.00. Three items reached the statement that nobody had entered: the account fee, the insurance direct debit and a small interest payment. One entry was wrong: a customer paid 1,380.00, but the receipt went into the books as 1,830.00, with two digits swapped. Recording the three items and correcting the receipt brings the books to 9,417.50.

Then compare. Both sides now show 9,417.50, so the account is reconciled at 31 March. Notice where each adjustment belongs. The bank-side items are timing differences, so nothing more is entered for them; you look for them on April's statement. The book-side items are entries you make, each backed by the bank statement or, for the correction, the customer's remittance advice.

If the adjusted figures still differ, at least one item is still to be found, and working through these checks in order usually turns it up. Write down the exact difference first, because its size often points to the cause.

1. Compare this period's opening balance with the closing balance of your last reconciliation. If they differ, something in a period you had already reconciled has been changed, deleted or added since, so look there first.
2. Confirm the statement and your books run to the same date, and that nothing dated after the statement date has been ticked as matched.
3. Search both sides for one amount equal to the difference. A single unrecorded fee, deposit or payment is often the cause.
4. Search for an amount equal to half the difference. A deposit entered as a payment, or a payment entered as a deposit, shifts the balance by twice its value.
5. Divide the difference by 9. If it divides exactly, look for an amount with two digits swapped, as with the 1,830.00 receipt above, or with its decimal point slipped, such as 52.00 entered for 520.00.
6. Look for doubles: a transaction imported from the bank and also typed in by hand, or one statement line matched to two entries in your books.
7. If none of these finds it, go back to the top of the statement and tick each line against the books again.

When you find the cause, fix it where it started: record the missing item, correct the entry with its supporting document, or raise the error with the bank, as set out under explaining the differences.

• Reconciling to the bank feed instead of the statement. A feed can miss a line or bring one in twice. Spot it by comparing the closing balance your software shows for the bank with the one printed on the statement; fix it by working from the statement and removing any line the feed repeated.
• Recording a transfer between your own accounts as income or an expense. Moving money from the cheque account to a savings account is neither. Spot it as the same amount leaving one account and arriving in the other, each coded to income or expenses; fix it by recording one transfer between the two bank accounts, then reconciling both.
• Matching on amount alone. Two payments of the same amount to different suppliers are easy to swap. Spot it when a supplier says a bill your books show as paid is still owing; fix it by checking the date and payee on every match, not just the figure.
• Letting old items pile up on the outstanding list. A deposit that never cleared may never have been banked, and a cheque that is never presented may have gone astray. Spot them by the dates on the list; fix each by finding out what happened, then correcting the books to match.
• Editing a reconciled transaction to make this month work. Changing an earlier entry moves the opening balance and undoes a reconciliation already finished. Spot it with the opening balance check above; fix it by restoring the earlier entry and recording any correction now, with a note of why.

The ATO's record-keeping tips suggest reconciling cash and EFTPOS sales regularly, by checking that the payments recorded in your own records match external records, and entering the amounts into your main accounting software. Depending on the business, that may be daily, weekly or monthly.

A business with many card sales may reconcile daily, while one with a few transactions a week may find monthly enough. Whatever the frequency, the ATO's advice is to check for mistakes whenever things don't add up.

How long a reconciliation takes depends mostly on how many transactions there are and how long it has been since the last one. Little and often is usually quicker overall: there are fewer lines to match, and the reason for each is still fresh. Either way, reconcile every business account, including savings accounts and those with only a few transactions, before you use the month's reports.

A bank reconciliation report is the finished statement in a form you can file. If your software produces one, check it shows the details below; in a spreadsheet, include them yourself:

• the account name, the last few digits of its number, and the statement date
• the closing balance on the statement and the balance in your books on the same date
• each outstanding deposit and unpresented payment, with its date, description and amount
• any bank error you have raised, and when you raised it
• the difference remaining, which should be zero
• who did the reconciliation, and on what date

Read the outstanding items each time. A short list of recent items is normal; anything carried over from an earlier month needs a note saying why it is still open.

File the report with the bank statement and the documents behind each correction. business.gov.au lists bank records among the records a business must keep, says most business records need keeping for 5 years, and says records must be stored in a way that prevents them being changed or damaged.

Partly. Accounting software with a bank feed brings the bank's transactions straight into your books and suggests matches, which takes care of much of the typing and ticking. What still needs a person is checking that each match is right, explaining a deposit nobody recognises and following up a bank error. Whatever the software matches, someone who knows the business still has to check it.

Without software, a spreadsheet does the same job. Keep two lists for the period, your cash book and the statement lines, each with date, description and amount. Mark each matched pair, total what is left unmatched on each side, and lay out the final statement as in the example above, with a cell that shows the difference. Save each month's file separately rather than overwriting the last one, so earlier reconciliations stay as they were.