How to do a bank reconciliation for a small business
To do a bank reconciliation, compare every line on your bank statement with the matching entry in your accounting records, explain each difference, and confirm that the adjusted balances agree on the statement date. Do it every month at least, and weekly if you have many transactions, so errors and missing entries are caught while you can still remember them.
- A bank reconciliation proves that your books and your bank agree, and explains any gap.
- Start from the statement’s closing balance and the ledger balance for the same date.
- Tick off matching lines, then investigate every line that does not match.
- Most differences are timing (uncleared items), missing entries, duplicates or typing errors.
- Reconcile bank, card and payment-processor accounts, and keep a signed record of each one.
This page uses an illustrative example, not a named FrugalPod customer.
Step by step
Gather the statement and the ledger for the same period
Download or open the bank statement for the period, and the transaction list for the same account in your accounting software or spreadsheet. Both must cover the same dates and the same account. Note the opening and closing balances on the statement, and the ledger balance at the statement date. If last month’s reconciliation was never finished, finish that first, because old differences carry forward.
Check the opening balance
Your opening balance on the statement should equal the closing balance of the previous reconciliation. If it does not, someone has changed a past entry, or a prior month was reconciled wrongly. Resolve this before going further. Otherwise you will chase differences that began months ago and will not know why the total is out.
Match each statement line to a ledger entry
Work down the statement and tick each line that has a matching ledger entry with the same amount and a similar date. Match deposits to receipts, payments to bills and expenses, and bank fees and interest to their entries. Watch for batched deposits: a card or payment processor often pays several sales in one lump sum, minus fees, so one bank line can match many ledger lines.
Investigate lines that do not match
List every leftover line on both sides. Items in your books but not yet on the statement are usually timing, such as a cheque not yet cashed or a deposit in transit. Items on the statement but not in your books are missing entries: fees, interest, direct debits, refunds or a customer paying you directly. Look also for duplicates and swapped digits, such as 54 entered as 45.
Record the missing entries and fix errors
Enter each missing transaction in your books, with the right category and date. Correct duplicates and typing errors rather than hiding them with a balancing figure. Never use a “plug” entry to force the difference to zero, because it conceals the real problem. If you cannot explain an item, leave it flagged, ask whoever made the payment and note the question.
Confirm the balances agree and sign off
Take the statement’s closing balance, add deposits in transit, subtract uncleared payments, and compare the result with the ledger balance. They should be equal. Save the statement and a short note listing what was outstanding. The person who reconciles should not be the only person who can approve the payments, so ask a second person to review it where you can.
Repeat for card and payment-processor accounts
Do the same for each credit card, loan, and payment or payout account. Payment processors are the most common source of trouble, because they pay out net of fees and refunds on their own schedule. Reconcile the processor’s payout report to your sales first, then match the payout to the bank deposit. Set a regular day for all of it, so it never builds up. Once every account agrees, the month-end close checklist is the next stage.
How often should you reconcile a bank account?
Reconcile at least monthly, and weekly or daily if you handle many transactions. A short, frequent reconciliation takes less time than one long monthly job, because fewer items have to be remembered. Frequent checks also show fraud, bank errors and duplicate charges sooner. Your bookkeeper or accountant can advise which rhythm suits your business.
A worked example
Marta runs a small bakery. Her bank statement closes at 4,820, but her books show 4,935. A supplier payment of 150 has not cleared yet, so the adjusted bank balance is 4,670. In the books she finds a bank fee of 35 she never recorded and a customer payment of 230 entered twice. Recording the fee and removing the duplicate takes the books from 4,935 to 4,670, and both sides agree. This is an invented example to show the method, not a real business.
When not to automate a reconciliation
- Unexplained items that might be fraud or an error at the bank: a person should look into these.
- The first reconciliation after a messy period or a change of accounting software, where you need to understand each difference.
- Anything that changes the books by a large or unusual amount. Review it by hand before it is posted.
- Tax and accounting treatment of an item you are unsure about. Ask a qualified accountant, since rules vary by location.
A bank reconciliation checklist to copy
- Before you start: Statement for the period downloaded. Ledger open on the same account and dates. Prior month signed off.
- Balances: Opening balance equals last month’s closing balance. Statement closing balance noted. Ledger balance at the statement date noted.
- Matching: Every statement line ticked or listed as unmatched. Batched payouts matched to the sales behind them.
- Differences: Deposits in transit listed. Uncleared payments listed. Missing entries recorded. Duplicates and typos fixed. No plug figures.
- Finish: Adjusted balances agree. Notes on anything unexplained. Statement saved. Reviewer’s sign-off and date.
Common mistakes to avoid
- Skipping months, so the differences pile up and become hard to trace.
- Using a plug entry to make the totals agree instead of finding the cause.
- Matching only by amount and ignoring dates, which hides duplicates and timing errors.
- Forgetting that a payment processor pays out net of fees and refunds.
- Having the same person record, pay and reconcile with no second review.
How the FrugalPod finance pod helps with reconciliation
FrugalPod’s finance pod includes a Reconciler that matches bank, card and payout lines to the ledger every day, so differences show up the day they happen instead of at month-end. The agents finish the work on their own, each with only the access its job needs, inside a hard budget cap. Every action is in the activity log, and you can revoke a connection at any time. Every plan includes every pod; you can get started free with 100 credits and no card. See pricing.
ReconcilerMatches bank, card and payout lines to the ledger, daily.
Close assistantPrepares accruals and the month-end pack for review once the accounts agree.
Related
Common questions
Something missing? Write to admin@frugalpod.com and a person will reply.
What is a bank reconciliation?
A bank reconciliation is a check that compares your bank statement with your own accounting records for the same period and account. It confirms that both agree after allowing for timing differences, and it exposes missing entries, duplicates and errors.
How do I reconcile a bank account step by step?
Match the opening balance, tick each statement line against a ledger entry, and list what is left over. Record missing entries, fix errors, then confirm that the adjusted statement balance equals the ledger balance. Save the statement and a short note, and have someone review it.
What if my bank reconciliation does not balance?
Check that the opening balance matches, then look for a duplicate or a transposed digit. Divide the difference by nine, since a quotient with no remainder often points to swapped digits. Look also for a missing fee, a batched payout or a wrong date. Do not plug the difference.
Can AI do my bank reconciliation?
AI can match lines and propose entries, but a person should still review what is posted to the books. With FrugalPod, the Reconciler matches bank, card and payout lines to the ledger daily on its own and logs every action. Owners can add an approval step for postings if they want one.