How to reconcile a business bank account step-by-step

As a founder or operator of a startup, it’s likely you rely on your books to understand your cash flow, spending, revenue, and overall financial health. But what happens when those records aren’t accurate?

A missing $20 bank fee or a small duplicate entry may not seem significant on their own, but unreconciled transactions can accumulate and make financial issues harder to identify and correct. Regular account reconciliation allows you to catch any discrepancies early and ensure your transactions are recorded correctly every time.

In this article, we’ll show you how to reconcile your bank account with a step-by-step process, giving you a reliable financial foundation to support you through cash management, tax preparation, talks with investors, and growing your business.

Reconciling bank accounts is the process of comparing your business’s accounting records with your bank records to ensure they match.

A reconciled bank account confirms that the transactions recorded in your books reflect the money that has moved in and out of your bank account over a specific period of time. It involves comparing a number of items, such as withdrawals, deposits, payments, transfers, bank fees, and more, across the two records. If the account balance doesn’t match with the bank balance, you’ll need to investigate the discrepancy and make any necessary corrections so the accounts match.

Regularly reconciling your bank account helps keep your financial records accurate and ensures any financial issues are caught before they become major problems. Here are a few key reasons why reconciling your business bank account should be a priority for your startup:

Accurate books

When you regularly reconcile your bank account, you confirm that your accounting records reflect what happened in your bank account. This includes catching missing transactions like bank fees or identifying duplicate entries.

Fraud detection

Forged checks, unauthorized withdrawals, and suspicious charges are easier to spot during regular reconciliation. You can then separate unusual activity from other discrepancies, like payments that haven’t cleared yet.

Financial reporting

Accurate cash records ensure your financial statements, such as the balance sheet and income statement, are reliable. This gives you a clearer picture of your company’s financial position and helps you make decisions based on accurate information. For example, knowing your actual cash balance can help you decide whether you have room to make a large purchase or need to hold off on spending. Reliable records also make it easier to prepare for tax filing and share financials with investors.

Bank reconciliation discrepancies generally fall into two categories: legitimate timing differences and items that need investigation or correction.

Legitimate timing differences

• Outstanding payments: A payment has been recorded in your books but hasn’t cleared the bank.
• Deposits in transit: A deposit has been recorded in your books but hasn’t been processed by the bank.
• Processing delays: A transaction may be recorded in your books before it posts to your bank account, causing it to fall into different reconciliation periods.

Items that need investigation or correction

• Missing transactions: A payment, transfer, deposit, or other transaction is missing in your books. Unrecorded bank fees and interest are also common.
• Duplicate transactions: The same transaction has been recorded multiple times in your books.
• Incorrect amounts: The amount of the transaction in your books doesn’t match the amount processed by the bank.
• Transactions recorded in the wrong account: A transaction has been assigned to the wrong bank or cash account.
• Bank error: While uncommon, a bank may process or record a transaction incorrectly.
• Unauthorized transactions: Transactions you don’t recognize may indicate fraud and should be investigated promptly.

Gather the following items before you sit down to complete your reconciliation:

• Bank statements for the period you’re reconciling
• Accounting records for the same period
• Outstanding transactions, such as uncleared payments or deposits
• Supporting documentation, such as receipts, invoices, payment confirmations, and bills

If you have your previous reconciliation, it helps to keep that handy too so you can confirm your starting balance and track any outstanding items from the prior period.

Once you’ve gathered your records, you’re ready to start reconciling. Here’s how to work through the process from start to finish:

Step 1: Choose the period you’re reconciling

Determine the period of time you want to review, such as a particular month. Whatever period you choose, make sure your bank records and accounting records cover the same date range so that you’re comparing apples to apples.

Step 2: Compare your bank balance with your books

Compare the ending balance on your bank statement with the balance of the corresponding cash or bank account in your accounting records.

If the two numbers match, your account is probably in good shape. That said, you should still verify that the underlying transactions match. While uncommon, errors could offset each other and result in a matching balance.

If the two numbers don’t match, you’ll need to take a closer look at what’s causing the difference. There are a number of possible explanations, such as a transaction that hasn’t yet cleared. Note the difference between the two balances so you know what you need to account for as you continue the reconciliation.

Step 3: Match transactions between your bank account and accounting records

Go through your bank statement line by line and match each transaction to the corresponding entry in your books.

Look at key details such as amount, date, and payee or payer. Do this for all deposits, customer payments, purchases, transfers, withdrawals, and other types of transactions. If any transaction appears in one record but not the other, flag it for further investigation.

Step 4: Account for outstanding and timing-related transactions

Look for transactions that are recorded in your books but don’t yet appear on your bank statement. Timing differences can cause this, such as outstanding checks, payments that haven’t cleared, or deposits in transit that the bank hasn’t processed yet.

Confirm that these are legitimate timing differences and keep track of any outstanding items so you can make sure they clear during a future reconciliation period.

Step 5: Investigate any discrepancies

Review any transactions that remain unmatched after you have accounted for the timing differences.

Look for issues such as:

• Duplicate entries
• Missing transactions from your books
• Incorrect transaction amounts
• Transactions recorded in the wrong account
• Bank fees or interest not accounted for
• Unauthorized transactions
• Data entry errors

Identify the reason for each discrepancy, and use supporting documents, such as receipts, invoices, and payment confirmations as needed.

Step 6: Make adjustments and confirm the balances reconcile

The final step in reconciling a bank account is to correct any errors and add any missing transactions to your accounting records. For legitimate timing differences, such as outstanding payments or deposits in transit, no correction may be necessary; instead, just make sure to account for them in your reconciliation.

Once you’ve made any necessary corrections and accounted for timing differences, calculate the adjusted bank balance and adjusted book balance. The two numbers should now agree. (If they don’t, go back through the previous steps to look for a transaction or discrepancy you may have missed.)

Document the completed reconciliation and any outstanding transactions that need to be checked during the next reconciliation period.

A good rule of thumb is to do it every month. This way, you can keep your books current and catch discrepancies before they snowball. It’s best to build bank reconciliation into your regular month-end close process so that you have a consistent routine.

Many businesses wait until tax time to reconcile their accounts, which means you may be dealing with months of missing, duplicated, or incorrectly recorded transactions. This can make bookkeeping cleanup much more difficult.

In addition to a routine monthly bank reconciliation, some businesses complete additional bank reconciliations before important financial events, such as undergoing an audit or providing financial records for due diligence.

Reconciling your business bank account is a detailed, time-consuming task that needs to be done on a regular basis. It’s certainly possible to do it manually, but startups often choose to use bank connections and accounting software to simplify and speed up the reconciliation process.

The right bank connection tools can import transactions automatically into your accounting software, reducing the need for manual data entry. Software can match bank activity with entries in your books, in addition to flagging discrepancies, unmatched transactions, and unusual transactions.

When your banking and accounting live on the same platform, you may be able to automate even more of the process. For example, Mercury Books, which is built directly into your Mercury account, reconciles your account automatically when each monthly statement is generated, recording the ending balance and marking entries for that period as reconciled.

Accurate books can give you the clarity and confidence to better manage spending and cash flow and make more informed business decisions. Keeping them accurate requires regularly checking that what’s recorded in your books reflects what’s actually happening in your bank accounts. Bank reconciliation is a key part of that process.

Reconciliation can be time-consuming, but the right tools can make it more manageable for founders and operators. Mercury Books connects with your external financial platforms to regularly categorize and reconcile transactions, generate financial statements, and more. See it in action.

^{This article is for informational purposes only and does not constitute legal, tax, investment, or financial advice. Founders should consult their own legal and financial advisors before making important financial decisions.}