Money Matters

Bank reconciliation: This is how to save time on this vital task

Bank reconciliation is a core task for business owners and finance managers. Here's how to do it for superb insight into your finances.

There’s no getting away from the fact that running or managing a business requires the need to tackle regular administration tasks.

One such requirement is bank reconciliation.

Although the term might make you groan, technological progress has made it a simpler and faster procedure than it once was.

With the right accounting software, it can take as little as a few minutes once you start to keep on top of it – potentially turning it into a quick daily task that significantly boosts your visibility of your business finances.

The result is greater flexibility and agility, and smarter decision-making for your business.

Here’s what we cover in this article:

What is bank reconciliation?

The three methods of bank reconciliation

Why is bank reconciliation important?

How to do bank reconciliation

Final thoughts on bank reconciliation

Bank reconciliation is a process where you match what your bank says is the case with your finances against what your accounting software’s ledger says.

If the two balances match, you’ve successfully reconciled.

Incoming and outgoing payments are considered in reconciliation, as are charges such as bank fees that might not appear in your accounting software (but will have to be added).

Everything should always match up. If it doesn’t, that’s a clue that something has gone wrong and needs to be fixed.

If you create an invoice for a large customer order in your accounting software, for example, this will need to be reconciled against the payment when it’s received. Until the received payment is reconciled, a false impression is created.

You may avoid making purchases, for instance, because you believe your bank balance is lower than it really is.

Of course, if the invoice shows as not being reconciled – even after you’ve reconciled everything properly – this indicates the payment should be chased, assuming the agreed payment terms have expired.

Depending on the software you use, and which bank you’re signed up with, there are three options for reconciliation.

1. Manually reconcile

Perhaps the oldest method is to manually reconcile against the printed bank statement you receive or a PDF version of this on your computer.

You might even have your online banking open in a browser window, alongside your accounting software in order to match and reconcile transactions.

It’s clear how labour-intensive this task is.

This can mean people simply put it off – which means their accounting isn’t providing the insight they need.

2. Download and import

So, technology has provided a solution.

In the first instance, it’s sometimes possible to download the statement from your bank and import it into your accounting software.

This means reconciliation becomes a task where you match entries in one on-screen table against another.

3. Connect your bank feed

However, the gold standard for ease of use is connecting the bank feed directly to your accounting software, so the transactions are imported automatically and near-instantly in the background.

This can speed up the process of reconciliation to the extent that it becomes something you spend a few minutes taking care of each day, thereby ensuring your accounting is always up to date.

This will depend on whether your bank supports Open Banking. Many do, but not all.

Building on top of bank feed functionality, some accounting software even includes features to automatically reconcile transactions.

If you regularly receive a payment each month with the same reference, for example, you can configure the software to reconcile it immediately.

Increasingly, artificial intelligence functionality is enhancing this so the accounting software can recognise new or irregular transactions, and reconcile them automatically without user input (although it’s always wise to check).

Reconciliation is a vital business practice that helps you to be clear on what’s happening with your cash flow.

If you don’t undertake reconciliation regularly, your accounting software won’t display how much money your business has – and how much you can spend or expect to receive.

But more than this, if your business finances ever need to be examined – by your accountant at year-end, for example, or even by HMRC – regular and accurate bank reconciliation is vital.

Accounting software is increasingly sophisticated, and often includes reporting and dashboard features.

These aim to provide an up-to-the-minute, at-a-glance view of your business finances so managers are empowered to act immediately.

Without correct bank reconciliation, it can’t provide the incredible insights and power that it does.

Managers might simply shrug at the thought of not having this level of insight. It’s true that a business can operate successfully without it.

But the use of reports and dashboards can provides the kind of competitive edge that could give you an advantage over your competitors, which leads to growth and new business.

However, there’s a more fundamental reason to undertake bank reconciliation.

You can spot any errors introduced by the bank, such as erroneous debits, credits or charges.

You should never assume your bank is correct.

On a similar theme, regular bank reconciliation can be an invaluable way to spot any fraudulent activity from within the business.

Let’s run through some general steps required to undertake bank reconciliation.

Here we assume you’ve just received a bank statement.

Step 1: Check your entries

Before you even start, ensure you’ve entered all recent transactions within your accounting software up until the end date of the bank statement that you’re using to reconcile.

For example, if your business means people create invoices or purchase orders outside of the accounting software, you should ensure these details have been correctly inputted.

Step 2: Select the bank account

In many accounting packages, the first step for bank reconciliation is to select the bank account that’s provided the statement.

There should then be an option to reconcile transactions.

Step 3: Provide summary information

Your next step will probably be to provide summary information.

This is to tell the accounting software the date the statement runs up to, inputting the statement’s final balance, and providing a reference for your own purposes so you can view this reconciliation in future (typically some combination of the date is sufficient).

Step 4: Start reconciling

Now begins the work of reconciling.

Check what appears in the list against the bank statement you have. To reconcile the entry in the accounting software you may have to tick a box.

Alternatively, your accounting software may show two separate lists of unreconciled and reconciled entries.

Therefore you will have to click to move entries from the former to the latter.

Step 5: Check the list

Rather than reconcile each and every entry, you can visually check the list quickly and, if you’re sure everything is correct, select an option to reconcile all entries in one fell swoop.

It’s worth remembering that you can unreconcile transactions later, should you make an error.

Step 6: Look for amount increases and decreases

As you work to reconcile entries, you should see amounts increase or decrease in the receivables and paid boxes beneath the transactions list.

This should guide you as to whether you’re completing the reconciliation process correctly.

Step 7: Enter bank fees and charges

Bank fees, charges or earned interest that appear on the statement won’t exist in your accounting software’s reconciliation list.

Therefore, you’ll need to enter these manually as you reconcile.

There should be an option to do this in the software, and you’ll be invited to input the date, plus the charge or interest earned.

Step 8: Review the balance

Once you’ve completed the reconciliation, the balance listed below the reconciled transaction list should equal the target balance, which is what you entered from your statement when you started.

If the two don’t match then something is wrong and must be fixed before you can continue.

You might have missed an entry in the transaction list, for example. Perhaps you have an outstanding invoice or purchase order that you haven’t entered into your system.

Or you may have incorrectly entered the statement end amount when beginning the reconciliation process, or the incorrect end date (the latter of which means the accounting software won’t display transactions that should be included in the reconciliation list).

Step 9: Split the task if necessary

There’s no need to complete the entire reconciliation process at one sitting. You may find it necessary or easier to split the task across several or more attempts.

In most accounting software, you can simply click to save the reconciliation list. This will save it as a draft within your accounting software but without applying the reconciliations to the ledger.

Step 10: Add the reconciliations to the ledger

Once you’ve finished, you can click to write the reconciliations to the ledger. You may find at this point that you’re offered the option to print or save a PDF copy of the reconciliation for future reference.

This can be filed separately to your main accounting.

There’s no getting away from undertaking bank reconciliation if you’re serious about your business or your role within it.

Therefore, become the master of the task and make full use of modern technology so you can reap the rewards of having a closer connection to your business finances.

If your business embraces bank reconciliation rather than considers it a chore, you’ll have a competitive edge over your competitors – and that can make all the difference.

Editor’s note: This article was first published in May 2020 and has been updated for relevance.