Bank Reconciliation for a Small Business: A Simple Monthly Routine

Your books and your bank often record the same payment on different dates. A cheque you issue, for example, may sit in your books for days before the bank clears it. Charges, interest and direct credits can reach the bank before they reach your books. So the two balances are often different even when nothing is wrong.

The purpose of reconciliation is to separate harmless timing differences from real mistakes. It also shows, early, if a payment was taken from your account that you did not expect.

• ✓The bank statement for the month, downloaded from your bank or net-banking portal, covering the first to the last day.
• ✓The bank ledger from your accounting software or sheet for the same dates.
• ✓The previous month's signed reconciliation, so you can see which items were left open.
• ✓Your list of cheques issued and deposited but not yet cleared.
• ✓Payment gateway or UPI settlement reports, if customers pay you through them.

Make sure the opening balance in the books matches the opening balance on the statement, after allowing for the previous month's open items. If it does not, resolve that first. Everything else builds on it.

1. 01

   Tick off matching entries

   Go line by line down the bank statement and tick each entry that has a matching book entry with the same amount and a close date. Mark the book entry too, so you can see what is left.

2. 02

   List what is left on the statement

   These are items the bank has recorded that your books have not: charges, interest, direct debits, customer receipts you did not know about. Each one needs a book entry or an explanation.

3. 03

   List what is left in the books

   These are items you have recorded that the bank has not yet cleared: cheques issued, deposits in transit. Note the date of each so you can chase the old ones.

4. 04

   Correct the books

   Post entries for the bank-side items that are genuine. Correct any amounts keyed wrongly, entries posted twice, or receipts allocated to the wrong customer. Take advice before changing anything in a period that has already been filed.

5. 05

   Prove the result

   The corrected book balance, adjusted for the timing items, should equal the statement balance. If it does not, there is still an unexplained difference; keep looking before you sign.

Do not write off an unexplained difference as small. A small difference often hides two larger errors that happen to offset each other.

Gateway settlements usually reach the bank as one lump sum that covers many sales, less fees. The bank statement will not show the individual orders, so match the lump sum against the settlement report, not against individual invoices.

• Book gross sales, gateway fees and the net settlement separately, so the totals agree with the report.
• Keep the settlement report with the month's reconciliation.
• Check refunds and chargebacks, which often appear as separate debits.
• Our guide to payment gateway GST readiness covers the tax side of these fees and settlements.

The uncleared cheque is a timing difference and needs no entry. The bank charge is the only change to the books.

1. The statement for the month, stored with the reconciliation.
2. A one-page reconciliation showing both balances, each open item with its date, and a final difference of zero.
3. The name of the person who prepared it and the person who reviewed it. In a very small business these may be the owner and the bookkeeper.
4. A note on anything unusual and what was done about it.

A reconciled bank balance is also the starting figure for your cash forecast. Our guide to building a 13-week cash-flow view and the monthly finance dashboard guide show where it fits. Current reconciliations also make year-end work with your chartered accountant easier.