What is bank reconciliation?

How does bank reconciliation work?

The bank knows what actually happened to your money. The books know what you think happened. Reconciliation is comparing the two, line by line, and explaining every difference. When it is done, the book balance and the bank balance agree, or differ only by items that are genuinely in transit.

Historically it meant a printed statement and a highlighter. With Open Banking feeds the transactions arrive in the books automatically, and the job becomes confirming that each one is matched to the right invoice, bill or category. Good software proposes the match; you confirm or correct it.

It is the single most useful bookkeeping habit there is. A reconciled ledger means the VAT return is right, the profit figure is real, and the year-end is a summary rather than an investigation.

A worked example

A florist's books say the bank balance on 31 May is £5,420. The bank statement says £5,180. The difference is £240.

Working through the statement, two lines have no matching entry in the books: a card terminal fee of £38 and a Direct Debit of £202 for shop insurance. Both are genuine costs that were never recorded. She adds them, the book balance becomes £5,180, and the accounts now agree.

Had she not reconciled, May's profit would have been overstated by £240, the insurance would have been missing from her expenses, and she would have discovered both at the year end, along with eleven other months' worth of the same.

What are the common reconciling items?

• —Bank charges, card fees and interest, which appear at the bank before anyone records them.
• —Direct Debits and standing orders nobody remembered to enter.
• —Cheques or transfers recorded in the books that have not yet cleared the bank.
• —A customer payment received net of a fee, recorded gross.
• —Transfers between your own accounts, recorded on one side but not the other.
• —The same transaction entered twice, usually once from a receipt and once from the feed.