Bank reconciliations

It's a check of your books against the bank's own record. business.gov.au describes it as a cross-check of the amounts in your cash book against your bank statements. Each transaction in your accounting software is compared with a line on the statement, and each difference between the two is explained.

A reconciliation looks for four things:

• lines on the statement that aren't in your books yet
• entries in your books that the bank hasn't processed yet
• entries recorded twice, for the wrong amount or against the wrong account
• lines on the statement that nobody in the business recognises

Each month's reconciliation starts from the balance the last one finished on. A gap left in one month carries into the next, which is why it pays to find it while the month is fresh.

Accepting the matches your software suggests isn't a reconciliation on its own. A suggested match is a guess by the software, and two payments of the same amount can be paired the wrong way round. Each match is checked against what the transaction really was.

When the reconciliation is finished, each difference found is an item still to clear, a correction made in the books, an error raised with the bank, or a line on your list to explain.

Month end is the point where a month's records are closed off. The statements are out, each account is reconciled, and the month's reports are drawn from the reconciled figures. Once a month, as soon as the statement is issued, is the usual rhythm for bank, card and loan accounts.

Some records need checking more often than a statement arrives. For cash and EFTPOS sales, the ATO's record-keeping tips put the check against external records at daily, weekly or monthly, depending on the business. If an account is busy, we can agree to reconcile it more often.

Leaving it until the end of the financial year doesn't make the work smaller. It moves it to a time when the paperwork is harder to find. A payment from last week is easy to identify; one from much earlier in the year often needs a search through emails and receipts before anyone can say what it was.

A monthly rhythm also means each month's reports, and anything you pass to your accountant, are drawn from figures that have been checked against the bank. A cash balance that hasn't been reconciled can look healthier or weaker than it is.

Most differences fall into a handful of kinds, and each is handled in its own way. The aim is to explain each one, so you can see what it was and why the books changed.

Each correction shows in the month-end summary, so you can see what changed in which account. If a correction reaches back into a month that's already been reported, the summary says so.

Yes. An account with a statement can be checked against it, and each kind has its own points to watch.

• Credit cards: a card statement may close partway through a month, so the card is reconciled to the statement's closing date and balance. When the card has its own account in your software, repayments from your bank account are recorded as transfers between your own accounts.
• Loans: the balance is rolled forward from the lender's statement. The opening balance, plus interest and fees, less repayments, is compared with the lender's closing balance, and any gap is explained. Interest and fees come from the statement rather than an estimate.
• Other bank accounts: savings and second transaction accounts are reconciled the same way, and transfers between your own accounts are matched on both sides.

Some lenders issue statements less often than monthly. Between statements, the loan's repayments are checked against your bank account, and the balance is checked again when the next statement arrives. How a loan is split between what's due soon and what's due later is part of your accountant's year-end work.

Personal spending can turn up in business accounts, and business spending on personal cards. business.gov.au says that if one account is used for both personal and business banking, personal payments and expenses must be clearly identified in the cash book. We list the ones that show up in business accounts, and how they're recorded is for your accountant to specify.

If you'd rather keep reconciling yourself, our guide to doing a bank reconciliation walks through the steps. These are common places it goes wrong:

• Making a difference disappear with an adjusting entry. It hides an error instead of finding it, and the error tends to resurface later.
• Leaving uncleared items for months. Some turn out to be errors in the books, such as a payment entered twice, rather than timing.
• Recording a credit card repayment as an expense when the card's purchases are already in the books, which counts the card spending a second time.
• Treating a transfer between two business accounts as income in one and spending in the other, instead of matching the two sides to each other.
• Editing or deleting a transaction in a month that's already reconciled, which changes a balance that was checked.
• Not knowing what a line was. Bank descriptions can be cryptic, and a month later nobody remembers the payment. Receipts and invoices kept with the transactions as they happen make the answer easier to find.

Where past months were reconciled with one of these problems, they're put right, earliest month first, before the monthly routine carries on.