Bank Reconciliation: The Check That Makes Every Other Number Real

There is a moment in cleanup work I have come to expect. The owner is showing me their books, the categories look tidy, the Profit and Loss has a believable number on the bottom, and then I ask when the accounts were last reconciled.

Usually the answer is that the software says everything is matched.

Those are different claims, and the gap between them is where almost every serious bookkeeping problem I find has been hiding.

#What reconciling actually means

A reconciliation answers one question: does the cash balance in your books equal the cash the bank says you have, once you account for the timing differences between them?

You take three things:

• Your recorded ending balance for the month
• The bank’s ending balance from the statement
• The items that are legitimately in one and not yet the other

Then you prove one to the other. Not approximately. To the penny.

The timing differences are normal and expected. A check you wrote on the 28th that has not cleared. A deposit made after the bank’s cutoff. Those are outstanding items, and they explain a difference. What they cannot do is absorb a number nobody can identify.

#Why matching the feed is not reconciling

This is the part that costs people real money, so it is worth being precise about.

Your bank feed is an automated copy of your transactions, pushed into your accounting software by a connection between them. It is convenient, and it is usually right.

Usually is doing a lot of work in that sentence. Feeds drop transactions. They duplicate them when a connection is re-authorized. They occasionally import a pending amount that later settles for something different, and never revisit it. They go quiet for a few days after a bank changes its login flow, and the gap is invisible unless you go looking.

So when your software shows everything matched, what it is telling you is that your books agree with the feed. If the feed is missing four days of activity, your books are missing four days of activity, and they agree perfectly about it.

The statement is the authority. It is what the bank will produce under subpoena, what a lender asks for, and what an examiner will compare your return against. Reconciling against the statement is the step that catches what the feed did not carry.

#What the check actually catches

In practice, on real cleanups, this is what turns up:

Duplicated transactions. A re-authorized bank connection re-imports a stretch of history. Now an expense appears twice, your profit is understated, and your tax return claims a deduction you did not incur.

Missing deposits. A payment processor batches several sales into one deposit, the feed imports the batch, and one of the underlying sales was recorded separately as well. Or the feed missed the batch entirely and revenue simply is not there.

Transfers recorded as income. You move money from savings to checking and the feed presents it as a deposit. Categorized carelessly, that becomes revenue. This is the single most common reason a Profit and Loss shows a month the owner does not remember having, and it inflates the tax bill on money you only moved.

Stale outstanding checks. A check written eight months ago that never cleared is still sitting in your reconciliation, quietly overstating what you owe and understating your cash. Sometimes it was voided and never recorded. Sometimes it was lost and the vendor is waiting.

Bank errors. Rare, and they do happen. You will not find one without a reconciliation, and you cannot dispute what you never noticed.

#The order to do it in

1. Close the period. Reconcile a finished month against a statement that covers that month. Reconciling a partial month against a live balance is chasing a moving target.
2. Start from the statement, not the screen. Download the PDF. Take the ending balance and the ending date from it.
3. Tick off what cleared. Every item on the statement should exist in your books, and every cleared item in your books should be on the statement.
4. List what is legitimately outstanding. Checks written but not cleared, deposits in transit. Each one should be recent and explainable.
5. Prove the difference. Recorded balance, plus or minus outstanding items, equals the statement balance. If it does, you are reconciled.

Then do it for every account. Every checking account, every savings account, every credit card, including the card you opened for one purpose and forget you have. An unreconciled account is an unproven account.

#When it will not tie out

Do not force it. There is a plug entry in most accounting software that will make the difference disappear, and using it converts a specific findable problem into a permanent unexplained one.

Work in this order, because it goes from most likely to least:

• Check the sign. A difference that is exactly twice a transaction amount is almost always a debit recorded as a credit.
• Check for a transposition. If the difference divides evenly by 9, you have almost certainly transposed two digits somewhere. This is arithmetic, not superstition: swapping digits in a number always produces a difference divisible by 9.
• Look for the exact amount. Search the period for the difference as a transaction amount. Duplicates and omissions announce themselves this way.
• Check the dates at the boundary. Items around the statement start and end are the usual suspects, especially if the previous month was reconciled loosely.
• Confirm the opening balance. If last month was wrong, this month cannot be right. An opening balance that does not match last month’s proven ending balance means the problem is upstream and you are debugging the wrong period.

If you are still out, the difference is data, not noise. Note it, keep it visible, and resolve it. What you must not do is bury it.

#Why this is the foundation

Everything else in your books is an assertion you made. The category on an expense is your judgment. The description is your note. The profit figure is the sum of your own entries.

The reconciliation is the only routine step where an outside party, one with no stake in your bookkeeping and no ability to be talked into anything, independently confirms a number. That is what makes it load-bearing.

Which is why it is the first thing I check, and the first thing anyone reviewing your books will check. Unreconciled accounts mean the rest of the file is unverified, however tidy it looks.

If your accounts have not been reconciled against real statements in a while, that is a normal place to be starting from and a very fixable one. It is most of what catch-up work consists of, and it is where the surprises in a set of books stop being surprises.