How to reconcile accounts

Your books say what the business has and owes. A reconciliation tests one of those figures against evidence from outside the books. business.gov.au's glossary defines one kind, the bank reconciliation, as checking that the cash book's amounts line up with the bank statements. The same approach works for any account with an independent record.

The point isn't to make two numbers the same. It is to find out what makes up the gap between them, then fix whichever side is wrong and keep track of items that will sort themselves out in the next period.

Income and expense accounts also need review and, where suitable supporting records exist, reconciliation to those records. Sales can be checked against sales records, and recurring costs against bills or schedules. Balance sheet reconciliations often reveal missing or duplicated entries, while reviewing each income and expense account can reveal amounts coded to the wrong account.

1. Pick the date, usually a month end or a statement date, and bring the books up to that date.
2. Get the independent record at the same date.
3. Start from the last reconciliation: check its closing position carries through, and bring forward any items still open.
4. Match items on the two sides, ticking off each one found in both.
5. List what is in the outside record but not your books, and what is in your books but not the outside record.
6. Sort each unmatched item by its cause, and act on it.
7. Write up what makes up the remaining difference, sign and date the reconciliation, and file it with the outside record.

• Timing: the transaction is real and correctly recorded, but one side caught up with it before the other, for example a cheque deposited on the final afternoon of the month. Note it, and check it clears next time.
• Errors or gaps in your books: an entry missing, duplicated, keyed wrongly or posted to the wrong account. Correct it with a document behind the correction.
• Errors by the other party: the bank, supplier or provider has recorded something wrongly. Leave your correct entry alone, raise it with them in writing, and keep it on the reconciliation until they fix it.

1. Bank accounts and cash first, because almost every other account has entries that pass through them.
2. Credit cards and loans, using the payments already confirmed in the bank reconciliation.
3. Clearing accounts for card takings and cash waiting to be banked.
4. Accounts receivable and accounts payable, now that customer receipts and supplier payments are confirmed.
5. Inventory, if you hold stock, against the stock records and any count.
6. Suspense and any other balance sheet accounts, then a trial balance to review everything together.

A one-page register shows at a glance which accounts are reconciled and what is still open.

Each line names what makes up its difference, and the open items carry into next month's register, where they should either clear or be followed up again.

Frequency is a judgement for each account. For cash and EFTPOS sales, the ATO's tips call for a regular comparison of your own records with outside ones, at whatever interval suits, from daily to monthly. Busy accounts such as the main bank account may need weekly attention; a loan with one repayment a month needs a check each statement.

File each reconciliation with the statements it used. business.gov.au's general keeping period for business records, bank records among them, is 5 years.