Bank Reconciliations: Why They Are Important
There are some jobs in bookkeeping that don't sound particularly exciting. Bank reconciliation is definitely one of them. It doesn't generate sales, bring in new customers or make your business look particularly impressive. You probably won't find business owners enthusiastically discussing their latest bank reconciliation over dinner but it's one of the most important tasks we undertake.
Modern accounting software has made the process so much easier than it used to be, there's a danger that businesses underestimate its importance. After all, if the bank feed is connected and the software is happily displaying a row of green ticks, everything must be correct. Mustn't it?
Well, not necessarily. Bank reconciliation is about much more than ticking transactions off a list. It's an important financial control that helps establish whether your bookkeeping records are complete, reliable and accurate. While it might seem like a relatively insignificant exercise, the consequences of getting it wrong can be anything but.
What actually is a bank reconciliation?
Let's remove the accounting terminology. A bank reconciliation is the process of comparing the transactions recorded in your bookkeeping software with the transactions shown on your actual bank statement. The aim is to establish that everything has been accounted for and that the balances agree, allowing for any genuine differences that need explaining.
In simple terms, does what your bookkeeping says happened in the bank agree with what actually happened? If your bank statement shows £12,450 but your bookkeeping records show £13,200, something needs investigating.
Perhaps a payment is missing.
Perhaps something has been entered twice.
Perhaps a transaction has been recorded for the wrong amount.
The reconciliation process helps identify those differences so they can be investigated and corrected.
There's an important distinction here. Making the balances agree is only part of the job. Understanding the transactions is just as important.
But my bank feed is connected!
This is probably one of the biggest misconceptions surrounding modern bookkeeping. A bank feed is incredibly useful. It automatically imports transaction information from your bank into your accounting software, reducing the need for manual data entry.
Wonderful.
Your bank feed isn't a tiny qualified bookkeeper living inside your accounting software. It's a way of transferring information. It doesn't necessarily know why you paid £1,200 to a particular supplier. It doesn't know whether that £5,000 arriving in your account was sales income, a loan, a director introducing money or a transfer from another account and it certainly doesn't guarantee that every transaction has been imported correctly. Bank feeds can disconnect, transactions can be missed and occasionally information can be duplicated. That's why a connected bank feed is not a substitute for reconciling against an actual bank statement. The bank statement provides an independent record against which the bookkeeping can be checked.
Let's look at an example
Imagine a small business with the following balances at the end of the month:
Balance | |
Bank statement | £12,450 |
Bookkeeping software | £13,200 |
Difference | £750 |
Something isn't right. The bookkeeper starts comparing the transactions in the accounting records with the bank statement. After investigating, they discover that a £750 supplier payment appears on the bank statement but hasn't been recorded in the bookkeeping. Once the missing payment is entered correctly, the balances agree. Problem solved and that's a relatively straightforward example.
Now imagine the same issue happening across several months, with missing transactions, duplicate entries and incorrectly recorded payments all building up. Suddenly, identifying the problem becomes considerably more time-consuming. Which is why regular reconciliations matter. It's much easier to investigate a discrepancy while the transaction is still fresh than to reconstruct what happened nine months ago.
What can a bank reconciliation uncover?
Regular bank reconciliations can reveal a surprising number of problems. Missing transactions are an obvious one. If a payment has left the bank but hasn't been recorded in the bookkeeping, the reconciliation should help identify it. Duplicate transactions are another. Perhaps a payment has been entered manually and subsequently imported through the bank feed. A reconciliation can also highlight incorrect amounts, payments allocated against the wrong outstanding invoice, unexplained transfers or transactions recorded in the wrong bank account and sometimes it reveals something more concerning.
An unfamiliar payment.
A direct debit nobody recognises.
A supplier apparently paid twice.
An unexpected withdrawal.
These don't automatically mean fraud has occurred, but they absolutely deserve investigating.
Regular reconciliation is an important financial control because it gives businesses another opportunity to identify transactions that shouldn't be there. It won't guarantee that every fraudulent transaction is detected, but it's considerably better than never checking at all.
What a bank reconciliation won't tell you
Now, this is where things get particularly interesting because it's entirely possible to have a bank account that reconciles perfectly while the bookkeeping is still wrong.
Let's imagine £5,000 arrives in your business bank account. The transaction is imported into your bookkeeping software and recorded as sales income. The bank reconciles. Everything agrees....
Except the £5,000 wasn't sales income. It was a business loan.
Your bank reconciliation may be perfectly correct, but your Profit & Loss is now showing £5,000 of income that shouldn't be there, while the corresponding loan liability hasn't been recognised.
Or imagine a £2,000 payment for equipment is incorrectly recorded as ordinary repairs and maintenance. The bank reconciles but the accounting treatment may be wrong.
The same applies to VAT. A transaction could be recorded using the wrong VAT rate, with VAT reclaimed where it shouldn't have been, or with VAT omitted where it should have been accounted for. The bank reconciliation wouldn't necessarily identify any of those errors. That's why good bookkeeping involves more than simply making transactions match. We need to review how they've been recorded. We need to understand what they relate to and we need to recognise when something doesn't look right.
A reconciled bank is an important starting point for reliable accounts. It isn't proof that every figure in those accounts is correct.
Automation makes checking even more important
Modern bookkeeping software is brilliant at automating repetitive tasks. Bank rules can automatically categorise transactions. Integrations can transfer information between systems. Regular payments can be recognised and processed with minimal intervention. Used correctly, these features save an enormous amount of time but automation brings its own risks.
Imagine setting up a bank rule that automatically records every payment to a particular supplier as office expenses. Unfortunately, some of those payments relate to equipment purchases that should have been treated differently. If the rule is applied automatically, the same mistake can happen repeatedly. One incorrectly categorised transaction is inconvenient. Two hundred incorrectly categorised transactions are considerably more inconvenient and because everything has happened automatically, nobody noticed. Automation makes things faster. It doesn't necessarily make them right. In fact, where businesses rely heavily on automation, regular reconciliation and transaction reviews become even more important. The software is doing what it has been instructed to do. Someone still needs to establish whether those instructions were correct.
Why does this matter for your financial reports?
Your Profit & Loss and Balance Sheet are only as reliable as the information behind them. If transactions are missing, duplicated or incorrectly recorded, those reports can become misleading.
Perhaps your business appears more profitable than it actually is because expenses haven't been recorded.
Perhaps the bank balance is wrong.
Perhaps loan repayments have been recorded as expenses rather than correctly separating capital repayments and interest.
Perhaps money transferred between two business bank accounts has accidentally been treated as income in one and expenditure in the other.
None of these situations gives you reliable information for making business decisions and that's the real value of bank reconciliation when combined with a proper review of the bookkeeping. It helps establish whether the financial information you're relying on can actually be trusted. Making decisions using incorrect figures is rather like following a satnav that confidently tells you to drive into a lake. The instructions might look convincing. That doesn't make them right.
What about VAT returns?
Bank reconciliations are particularly important when preparing VAT returns. Before submitting a return, we want to know that the relevant transactions have been recorded and that there aren't missing or duplicated payments affecting the bookkeeping. An unreconciled bank can be a warning sign that the underlying records aren't complete. Of course, as we've already established, reconciling the bank doesn't automatically mean the VAT return is correct. We still need to consider VAT rates, supporting invoices, adjustments and the treatment of individual transactions. Businesses accounting for VAT on an accruals basis must remember that VAT isn't determined solely by what has passed through the bank. However, completing reconciliations is an important part of the wider checking process. Submitting a VAT return while significant bank discrepancies remain unexplained is rarely a good starting point.
Don't forget your other accounts
Another common mistake is concentrating entirely on the main business current account. What about the savings account? The business credit card? PayPal? Stripe? Other payment accounts?
If transactions are moving through those accounts, they may also need reconciling.
Take a simple example.
You transfer £2,000 from your business current account into your business savings account.
That's not £2,000 of business expenditure followed by £2,000 of income.
You've simply moved money between two accounts belonging to the business.
Both sides need recording correctly.
If you only ever reconcile the current account, errors elsewhere can remain unnoticed. This is particularly important for ecommerce businesses, where payment processors may hold funds, deduct fees and issue pay-outs before the money reaches the bank. We've previously explored how important those reconciliations are in our guide to ecommerce bookkeeping.
How often should bank accounts be reconciled?
At least monthly. That's our recommendation for most small businesses. For businesses processing large volumes of transactions, weekly or even daily reconciliation may be more appropriate. The key is consistency. Leaving reconciliation until the end of the financial year creates unnecessary problems. By then, transactions may be months old. Staff might have changed. Invoices may be difficult to locate and nobody can remember what the £387.42 payment from last February actually related to.
Regular reconciliation keeps the workload manageable and means errors are identified sooner. It also makes year-end accounts preparation much easier. Your accountant is unlikely to be delighted when presented with twelve months of unexplained bank discrepancies and the reassuring words:
“I'm sure it's all in there somewhere.”
Why does my bookkeeper keep asking questions?
Here's something worth understanding. When your bookkeeper asks “What's this payment for?” or
“Can you send me the invoice for this?” or “Why has this customer paid you £1,500?” they aren't asking because they're particularly interested in your shopping habits. They're asking because they need to understand the transaction. A bank description doesn't always provide enough information to establish the correct accounting or VAT treatment and guessing isn't good bookkeeping.
Sometimes a quick explanation is all that's needed.
Sometimes we need an invoice or receipt.
Sometimes we discover something has been recorded incorrectly.
Those questions are part of the process of keeping accurate records. So when your bookkeeper asks for information, please don't assume they're simply being difficult. They're trying to make sure your accounts tell the right story.
Bank reconciliation isn't just clicking a button
This brings us to something I feel quite strongly about. There's a tendency to underestimate bookkeeping tasks because software has made them look simple.
Click a transaction.
Choose a category.
Press reconcile.
Next.
The value isn't in clicking the button.
It's in knowing whether the transaction has been recorded correctly.
It's recognising that the £5,000 receipt isn't sales income.
It's spotting that a supplier has been paid twice.
It's noticing an unexpected direct debit.
It's questioning why a transaction has appeared in the wrong account.
It's identifying when an automated bank rule has been applying the wrong treatment for months.
It's understanding when something needs further investigation.
Good bookkeeping requires knowledge, judgement and attention to detail, not simply the ability to press Reconcile.
A simple bank reconciliation routine
You don't need to turn bank reconciliation into an enormous monthly event. But there should be a proper process.
At least once a month:
Obtain the actual bank statement for the period being reconciled.
Check the transactions recorded in your bookkeeping against those on the statement.
Investigate missing, duplicate or unexpected entries rather than forcing the balances to agree.
Review how transactions have been recorded, particularly where automated rules or integrations are involved.
Check supporting documents and obtain explanations for anything unclear.
Confirm the reconciled balance agrees with the bank statement at the relevant date, accounting for any genuine outstanding items.
Review other relevant accounts, including credit cards, savings and payment processors.
If something doesn't make sense, investigate it.
Don't create a mystery adjustment simply to make the difference disappear. A balancing figure might make the screen look tidy, but it doesn't necessarily make the accounts correct.
Small task. Big value.
Bank reconciliation isn't glamorous. It probably isn't the reason you started your business. It's unlikely to feature in your next marketing campaign. It's one of those behind-the-scenes tasks that helps everything else work properly.
Regular reconciliation can identify missing transactions, highlight duplicate payments, expose unexpected activity and help ensure the bookkeeping is complete. Combined with proper transaction reviews, it supports accurate financial reporting, reliable VAT returns, better cash-flow information and smoother year-end accounts preparation. Perhaps most importantly, it gives you greater confidence in the financial information you're using to run your business because there's very little value in a beautifully presented Profit & Loss or Balance Sheet if the underlying information isn't reliable.
The next time your bookkeeper mentions bank reconciliation, don't dismiss it as simply another bit of bookkeeping administration. It might seem like a small, unimportant exercise but sometimes the most valuable work is the work you barely notice happening. The value of a bank reconciliation isn't simply making the numbers match. It's helping make sure the numbers you rely on can be trusted.
Comments