What is bank reconciliation? A plain guide.

Bank reconciliation in plain English

Your bank keeps one record of your money. Your accounting software keeps another. Bank reconciliation is the job of comparing the two, line by line, and explaining every difference until they agree.

In practice it has two parts:

• Matching each bank line. Every payment in and out of the bank is matched to something in the books. That might be a sales invoice, a supplier bill, a receipt, a wage payment or a transfer between your own accounts.
• Checking the balance. Once every line is dealt with, the closing balance in the software should equal the closing balance on the bank statement for the same date. If it does not, something is missing, doubled or wrong.

A reconciled bank account is the base for almost everything else. Profit figures, VAT returns, who owes you money and what you owe suppliers all depend on the bank being right.

What a reconciliation actually checks

It is easy to think reconciliation is just ticking lines off. The real point is to confirm three separate things:

• Completeness. Every transaction on the statement is in the books, and nothing is in the books that never went through the bank.
• Accuracy. Each amount and date is right, and each line is linked to the correct customer, supplier or cost.
• Coding. Each line sits in the right account. A payment coded to the wrong expense heading still balances, but your profit and VAT figures will be off.

The balance check catches the first two. Only a person looking at each line catches the third. That is why a reconciliation that "balances" can still leave the books wrong.

Why daily reconciliation matters

You can reconcile once a month, once a quarter, or every working day. Doing it daily makes each step smaller and easier.

Questions are easier to answer

A card payment from yesterday is fresh in someone's mind. The email receipt is near the top of the inbox. A payment from eight weeks ago is a different story. Nobody quite remembers it, and the receipt may be gone.

Missing paperwork gets chased in time

Records are a legal duty, not just good housekeeping. Limited companies must keep records of all money received and spent, with supporting documents such as receipts, invoices and bank statements, for 6 years from the end of the last company financial year they relate to. Sole traders must keep records for at least 5 years after the 31 January submission deadline of the relevant tax year. VAT-registered businesses must keep VAT records for at least 6 years, including all purchase invoices. Spotting a gap the day after a payment clears makes it far more likely the document can still be found.

VAT returns are calmer

The deadline for submitting a VAT return online is usually one calendar month and 7 days after the end of the period. That is also the deadline for your payment to reach HMRC. If the bank is already reconciled when the quarter ends, that window can be spent checking the return, not building it. Current books also make it easier to reclaim VAT on purchases, because the invoices are already on file.

You see your real position

A reconciled bank shows which customers have paid and which have not, and which bills are still to go out. Unreconciled books can make a business look richer or poorer than it is. Our guide to daily vs monthly bookkeeping goes into the trade-offs in more detail.

Common causes of differences

When the software and the bank disagree, the cause is usually one of a short list. Knowing the list speeds up the search.

• Timing. A cheque you wrote has not cleared, or a deposit was recorded in the books before it reached the bank. These are not errors. They should clear in the following days.
• Duplicates. The same payment was entered by hand and also came in through the bank feed, so it appears twice. Watch for this whenever a bank feed is switched on.
• Missing lines. A bank feed dropped a few days, or a feed was disconnected and reconnected. Lines from that gap never reached the software.
• Bank charges and interest. Small fees, card charges and interest appear on the statement but nobody records them.
• Payments matched to the wrong invoice. A customer pays £480 and it is matched to the £840 invoice. The bank balance agrees, but your list of who owes you is wrong.
• Transposed figures. £1,250 is typed as £1,520. A difference that divides exactly by 9 is a classic sign of two digits swapped.
• Transfers recorded once. Money moved between your current account and savings account is recorded on one side only.
• Deleted or edited reconciled lines. Someone changes a line that was already reconciled, and an old period that used to balance no longer does.
• Wrong opening balance. The balance brought in when the software was set up never matched the bank, so every later check is out by the same amount.

A worked example

How bank reconciliation is done, step by step

The software differs, but the method is the same everywhere:

• Get the bank lines in. Use a bank feed where you can, or import a statement file. Check there are no gaps in the dates.
• Match what already exists. Link payments to the invoices and bills already in the books.
• Create what is missing. Record new costs and income with the right account and VAT rate, with a receipt or invoice attached.
• Query what you cannot explain. Do not guess. Park the line and ask the business owner what it was.
• Compare the balances. Check the software balance against the statement balance for the same date. The difference should be nil.
• Lock the period. Once a month or quarter is right, use the software's lock date or close feature so nobody changes it by accident.

Bank reconciliation in Xero, QuickBooks and Sage

Menu names change between versions and plans, so treat these as an outline rather than click-by-click instructions.

Xero

Bank feed lines arrive in each bank account's reconcile screen. Xero shows the statement line on one side and a suggested match on the other. You confirm the match, find a different one, or create a new transaction, then click OK. Bank rules can code regular payments automatically, but each rule needs checking so mistakes are not repeated. Xero's bank reconciliation report lets you compare the balance in Xero with your statement balance. Read more about our Xero bookkeeping service.

QuickBooks

In QuickBooks Online, feed lines sit in a "for review" list in the banking area. You match each one to an existing transaction or categorise it as a new one. Separately, the reconcile tool asks for the statement ending date and ending balance. You tick off the cleared items until the difference shows nil, then finish. See our QuickBooks bookkeeping service.

Sage

In Sage Accounting, bank feed transactions are matched to existing items or created as new ones from the banking area. The reconcile screen then asks for your statement end date and closing balance, and you tick transactions until the difference is nil. Sage 50 has a similar bank reconcile screen. See our Sage bookkeeping service.

The same approach applies in FreeAgent and VT Transaction+, and receipt tools such as Dext help by getting the paperwork in before the line is matched.

Bank feeds do not reconcile on their own

Bank feeds are a big help. They bring the lines in automatically and suggest matches. But a feed is only the raw material. Someone still has to decide whether a suggestion is right, find the missing receipt, spot the duplicate and question the odd payment.

Automatic matching is also confident when it should not be. Two invoices for the same amount, a refund that looks like a sale, or a rule that codes every payment to one supplier as the same cost can all slip through if nobody looks.

If your reconciliation is months behind

Start with the oldest unreconciled month and work forward. Get a full set of statements first, so you know the closing balance for each month. Fix the opening balance if it is wrong, because every later month depends on it. Then reconcile one month at a time, and only move on when the difference is nil.

If the backlog is long, a catch-up bookkeeping job brings the books to a clean, reconciled position. After that, keeping them there each day is much less work.