There comes a time when you need to check that your accounting transactions match what’s shown in your bank account. This important task, known as bank reconciliation, should be the cornerstone of your bookkeeping practices.
Without bank reconciliation, your business could become the victim of fraud, submit incorrect accounts to Companies House, or file incorrect VAT returns. That’s why this post has been created, if you know how to correctly reconcile your accounts, you can stop errors such as these from creeping through.
Don’t forget, if you’re using QuickFile for your accounting needs, we make bank reconciliation easy with our Reconciliation Tool which can help you match the expected balance of your account against the actual balance.
However, if you’re not using QuickFile, you still need to know what to look out for, so let’s look further into how you reconcile your bank account.
How can you manually reconcile your bank account?
You should always use a method that works for you and your business and there’s no right or wrong way to reconcile your account.
Essentially, reconciliation is checking the expected balance on the account against the actual balance. If the balances match, then it’s likely that the transactions in the account are correct. However, if it doesn’t match, then it’s likely there’s an error somewhere that needs to be corrected.
There are a few steps involved in getting the information you need and then carrying out the reconciliation:
Step 1 - Gather your bank statements and business records
If you’re reconciling your account every month, then you need to have the bank statement for the month you’re reconciling. Likewise, if you’re reconciling quarterly, you need to have the bank statements for the quarter you’re reconciling.
While you can use your banking app or online portal for this you need to ensure you can see the bank balance for the period you need, not just the transactions that happened. This is why it’s recommended to use a statement, however, you should use the method you’re comfortable with.
Also remember that you need to have a detailed statement that includes fees, charges and interest. The more detailed the statement is the more data points you have to compare against.
Once you’ve got the bank statements you need, you need to have the business records for the same time frame, otherwise, you’ve got nothing to reconcile.
Step 2 - Match the balances
If, for example, your bank balance is showing £7,500 at the end of October, do your accounting records also show a balance of £7,500?
If your accounting records show you have a balance of £3,750, then there’s obviously something that’s gone wrong somewhere, and you need to take a closer look at the transactions.
Step 3 - Take a close look at the transactions
If there’s a mismatch in the balances, or you think something doesn’t look right, you need to take a closer look at the transactions. Are they all on the correct date, or are there discrepancies there? Are the amounts correct? Have you got a description you can’t match anywhere?
Go through your bank statement and compare it line by line with the accounting records to see if you can spot any mistakes and where they might have come from.
For example, did you enter a cheque into your accounts that later bounced, or did a supplier offer a discount or refund that you forgot to enter? Over time, these small transactions can build into bigger mistakes.
Tip - Check for transposed numbers with the rule of 9
If your reconciliation shows an unexplained difference, it could be that you’ve accidentally transposed a number when entering it, e.g. £3,605 should be £3,065 (in this case the 6 and the 0 have switched). This means your reconciliation is out by £540, which you might not find by checking transactions at a glance.
One trick here is to check whether the difference can be divided evenly by 9. If you get a whole number, you’ve likely accidentally switched figures somewhere. For example, 3605-3065=540, 540/9=60. Therefore, two of the numbers have been transposed.
While it’s time-consuming to go through every transaction and check, you can check the overall difference in your reconciliation. If, at the end of the process, you’ve found a difference that can be divided by 9, then you know you need to take a look for numbers which might have changed places when you entered them.
Be aware though, that it could be a coincidence that you can divide the difference by 9, so use this as a way of trying to narrow down the problem, rather than as a way of definitely finding the solution.
Step 4 - Make sure the transactions have cleared
If you still have a balance you cannot reconcile, you need to ensure the transaction has cleared with the bank. Typically, uncleared transactions are card transactions that appear a few days after they were made with the merchant.
If these transactions were entered into your accounting system on the day you made the purchase, they may not appear in your bank account for a few days, meaning that your reconciliation figures may not match.
Step 5 - Adjust the balances
Once you’ve identified any incorrect transactions you need to adjust them in the appropriate way. However, these transactions may be in previous accounting years, or they may have been included in a previous VAT return.
In these cases you need to ensure you’re adjusting them in a way that’s in line with what HMRC or Companies House would expect, so it can be worth checking with your accountant to ensure you’re using the correct procedure.
Step 6 - Repeat on a regular basis
You need to use a schedule that works for you and your business, but it can be a good idea to reconcile your accounts before you submit your VAT return and before you submit your annual accounts, just so you know that everything is correct before submission. You may find that, because of the nature of your business, you need to do it more often or less often than that.
Common errors that can be avoided with bank feeds
Here at QuickFile you can choose to use something known as Bank Feeds, if you connect your bank to us using a bank feed we can pull in your transaction automatically, so they’re likely to be more accurate.
There are numerous reconciliation errors you can avoid when using accounting software that allows Open Banking Feeds:
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Failing to record all transactions - because the transactions are pulled straight from the bank, they should appear in your accounting as soon as they have cleared.
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Recording transactions incorrectly - because there’s no manual intervention, there should be nothing to change, and therefore nothing to record incorrectly.
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Failing to account for bank fees and charges - as long as these are shown as a transaction on the account, they will be pulled into the software with the other transactions.
You can find a list of supported banks for the bank feeds on our website.
One common error you need to be aware of that cannot be helped by having a bank feed is having an incorrect opening balance on your account. If you have an incorrect opening balance on the account, then when you try to reconcile the account this error will be carried through.
Even if you have a bank feed in place, it’s still good practice to check your balance from time-to-time.
