As a business owner, you’ll get to a point where you need to reconcile your bank accounts. Bank reconciliation is done to ensure your records match and is an essential process for your small business. Getting it right means you can stay on top of your finances. Getting it wrong could end up costing you unnecessary money. 

This guide will help you understand bank reconciliation and ensure your business books are accurate and up to date. We’ll cover:

  • What bank reconciliation is
  • Why bank reconciliation is important
  • How to reconcile your bank accounts
  • How a system like Countingup helps you keep your records in order

What is bank reconciliation?

During a bank reconciliation, you compare the amounts on your financial records (general ledger account, balance sheet, cash flow statement, etc.) to the amounts on your bank statement to make sure they are correct. Any differences must be justified before the accounts can be reconciled. 

Bank reconciliation is crucial for controlling your assets (items of value) and correctly monitoring financial activities and transactions. It’s best to have an authorised record keeper like an accountant perform this process to ensure it’s done effectively.

Why is bank reconciliation important?

One of many reasons bank reconciliation is important in business is that it helps you keep track of what money has come in and what has gone out and identify any suspicious activity. It’s crucial to get it right, too, since you otherwise risk getting an inaccurate view of how much money you have in the bank. Getting bank reconciliation wrong could have painful consequences for your business. 

For example, if you fail to log a transaction, HMRC might think you’re underreporting your sales. As a result, trigger an inspection from a tax representative on the suspicion you’re not paying enough tax.

Another example might be if you add extra transactions or accidentally add the same transaction twice. In this case, HMRC will make you pay more tax than you should, which is a mistake that’s costly and time-consuming to rectify. 

Effective bank reconciliation helps you steer clear of these pitfalls, which is why you’re better off paying a professional to do it if you’re not able.

How do you reconcile your bank transactions?

Spreadsheets are fine for your reconciliation, but accounting software is much more efficient and significantly lowers the risk of mistakes. 

While it’s wise to hire an accountant to perform this task, you can also follow these steps to reconcile your bank accounts yourself:

Step 1: Get your bank and business records

First, you need a list of your transactions from the bank, either from a statement, your online banking or by having the bank send data straight to your accounting software. If you have both a business current account and a credit account, you’ll need statements from both. 

You also need to pull together your business records from wherever you keep them, whether it’s in a logbook, on a spreadsheet, or in your accounting software. For example, accounting software like Countingup will pull in bills and receipts with the help of data and receipt capture tools and extract the data automatically.

Step 2: Have your accounting system ready

You also need to have all your records open in front of you to make the reconciliation as easy as possible. If you perform bank reconciliations on a monthly basis, have your system open at the month you want to reconcile. 

Step 3: Match up your opening balances

The next step is to make sure the opening balance (the amount you have at the start of the month) in your accounting records matches the opening balance of your bank statement. Forgetting to do this means the end balances won’t match.

Step 4: Check each transaction

As you reconcile your accounts, check every transaction as you go along. Whether you perform this process manually or through an accounting system, it’s important to go back and double-check that you don’t miss or double-count any transactions. 

Step 5: Make sure your balances match

When you’ve gone through all your transactions, check that your closing balances on your accounting records and bank statements match up. The balance in your accounting system should match the one on your bank statement. If not, go back to step three and re-do it.

If your bank balance matches the balance on your accounting records, you’ve successfully reconciled your bank transactions. 

What if I have problems with my bank reconciliation?

You’ll most likely come across unexplained transactions every once in a while, where amounts appear on one set of records but not the other. While this might seem alarming, there’s often a logical explanation.

For example, if a transaction is missing on your bank statement, you probably just got income you didn’t bank or paid for something with cash or a different account. Look into how the difference appeared and make necessary notes. 

Similarly, if a transaction is missing from your business records, it might be because of an error when you entered a transaction. Or perhaps you forgot to enter it. Get to the bottom of it and make the adjustments and notes you need.

Figuring out mistakes can take a lot of time since you’ll need to go through your invoices, receipts, diary entries, emails, and so on to find the missing information. The more often you perform bank reconciliation, the more you can avoid these searches since you’ll have a more recent memory of the transactions. 

You can also minimise these errors and searches by using modern accounting software like Countingup. The system has a bunch of features specifically designed to make all aspects of bookkeeping easier. Read more below.

Make bank reconciliation easy with Countingup

Countingup is the business current account with built-in accounting software that allows you to manage all your financial data in one place. With features like automatic expense categorisation, invoicing on the go, receipt capture tools, tax estimates, and cash flow insights, you can confidently keep on top of your business finances wherever you are. 

You can also share your bookkeeping with your accountant instantly without worrying about duplication errors, data lags or inaccuracies. Seamless, simple, and straightforward! 

Find out more here.