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.

• 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.

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.