Why Reconciling Your Bank Account (and Other Accounts) Monthly Matters
If you own a small business, you probably check your bank account regularly. You want to know how much cash you have, whether customers have paid their invoices, and whether your bills are getting paid.
But there is a big difference between looking at your bank balance and actually knowing whether your business's books are accurate.
That is where monthly account reconciliation comes in.
Reconciling your bank account—and other important accounts—each month is one of the most important bookkeeping tasks a business owner can perform. It helps catch errors, identify missing transactions, prevent fraud, improve financial reporting, and give you confidence that the numbers you're using to make business decisions are accurate.
Unfortunately, reconciliation is also one of the bookkeeping tasks that many small-business owners put off.
"I'll get to it next month."
Then next month becomes three months.
Then six months.
Before you know it, your books are a mess and you're trying to figure out why your accounting software says you have $50,000 in the bank when your actual bank account has $37,000.
Let's look at why monthly reconciliation matters and why it should be a regular part of your bookkeeping process.
What Does It Mean to Reconcile an Account?
At its simplest, reconciliation means comparing the transactions and balance recorded in your accounting system to the actual activity reported by your bank or another financial institution.
For example, suppose your business checking account shows a balance of $25,000 on your bank statement.
You open your accounting software and see that your checking account has a balance of $25,000 as well.
That sounds great—but matching balances alone doesn't necessarily mean everything is correct.
You need to compare the individual transactions.
Did every deposit make it into your books?
Were all checks and electronic payments recorded?
Are there transactions in your accounting software that haven't cleared the bank?
Did the bank charge a fee that you forgot to record?
Was a transaction accidentally entered twice?
Reconciling allows you to identify these differences and determine whether they are legitimate timing differences or actual bookkeeping errors.
Why Should You Reconcile Monthly?
1. It Helps Catch Bookkeeping Errors
Everyone makes mistakes.
A transaction can be entered twice. A payment can be recorded for the wrong amount. A deposit can accidentally be categorized incorrectly. An electronic payment can be forgotten entirely.
The longer you wait to reconcile, the harder it becomes to find these mistakes.
If you reconcile your account every month, you're working with a relatively small number of transactions. If something doesn't match, you can usually identify the problem fairly quickly.
But imagine waiting until the end of the year.
Now you're comparing twelve months of transactions and trying to remember what happened in January.
Monthly reconciliation makes errors much easier to find and correct.
2. It Helps Identify Fraud
Reconciling accounts isn't just about finding innocent mistakes.
It can also help identify unauthorized transactions.
For example, you might discover:
An unfamiliar debit card transaction
An unauthorized ACH withdrawal
A check you didn't write
A duplicate payment
A suspicious transfer
An unexpected bank fee
A payment made from the wrong account
The sooner you identify unauthorized activity, the better.
If you only review your accounts once a year, a fraudulent transaction could go unnoticed for months.
Monthly reconciliation gives you another layer of protection.
3. It Makes Your Financial Statements More Reliable
Your profit and loss statement and balance sheet are only as accurate as the information going into them.
If your books contain missing or duplicate transactions, your financial statements may be misleading.
That creates a problem when you're trying to answer important questions like:
How profitable is my business?
Can I afford to hire another employee?
How much can I afford to take as an owner distribution?
Can I afford to purchase new equipment?
How much cash should I keep in the business?
If your books aren't reconciled, you may be making those decisions based on inaccurate information.
Monthly reconciliation helps ensure your financial statements reflect what actually happened in the business.
4. It Helps You Understand Your True Cash Position
One of the biggest misconceptions among business owners is that their bank balance equals their available cash.
It doesn't always.
You may have outstanding checks that haven't cleared.
You may have deposits that haven't posted.
You may have credit card payments that haven't been recorded.
You may owe payroll taxes, sales taxes, loans, or other liabilities.
You might also have transactions sitting in your accounting software that haven't actually cleared your bank.
Reconciling your accounts gives you a much clearer picture of what is actually happening with your cash.
And cash flow is critical for small businesses.
A profitable business can still run out of cash.
5. It Makes Tax Preparation Easier
Nobody wants to spend tax season trying to figure out what happened twelve months ago.
Unfortunately, that's exactly what can happen when bookkeeping isn't maintained throughout the year.
Monthly reconciliation helps ensure that transactions are recorded and categorized throughout the year instead of being discovered right before tax deadlines.
This can make tax preparation significantly smoother.
It also gives your CPA or tax preparer cleaner records to work with.
Instead of spending valuable time trying to determine whether your books are accurate, your tax professional can focus on reviewing the information and identifying tax-planning opportunities.
6. It Helps Prevent Small Problems From Becoming Big Problems
One of the biggest advantages of monthly bookkeeping is simple:
Small problems are easier to fix than big problems.
Suppose you discover that a $500 transaction was incorrectly categorized.
That's relatively easy to fix.
Now imagine discovering that hundreds of transactions have been incorrectly categorized over the past two years.
That's a much bigger project.
The same principle applies to unreconciled bank accounts, credit cards, loans, accounts receivable, and other balance sheet accounts.
Monthly reconciliation keeps problems small.
It's Not Just Your Bank Account That Should Be Reconciled
While bank reconciliation is one of the most common types of reconciliation, it isn't the only one that matters.
Businesses should consider reconciling other important accounts as part of their monthly bookkeeping process.
Credit Cards
Business credit cards should be reconciled just like bank accounts.
Credit card reconciliation can help identify duplicate transactions, missing expenses, personal purchases, and payments that weren't properly recorded.
It also helps ensure that the liability shown on your balance sheet matches what you actually owe.
Loans
Business loans should also be reconciled regularly.
Your accounting records should generally reflect the appropriate split between principal and interest.
For example, if you make a $2,000 loan payment, the entire $2,000 isn't necessarily an expense.
Part of the payment may reduce the loan principal while the interest portion is recorded as an expense.
Reconciling the loan account helps ensure your books accurately reflect what you owe.
Accounts Receivable
If your business invoices customers, your accounts receivable should be reviewed regularly.
You should know:
Who owes you money
How much they owe
How old the outstanding invoices are
Whether payments have been properly applied
Whether any balances need follow-up
A business can have strong sales and still experience cash-flow problems if customers aren't paying their invoices.
Accounts Payable
Accounts payable should also be reviewed to ensure outstanding bills are accurate and complete.
You don't want to accidentally pay the same vendor twice.
You also don't want to forget about a bill that is sitting in your accounting system.
Payroll Liabilities
Payroll-related accounts deserve special attention.
Payroll taxes, retirement contributions, employee deductions, and other payroll liabilities should be reviewed regularly to ensure they agree with payroll records and payments made.
Mistakes in payroll liabilities can become expensive quickly because they can result in penalties, interest, or employee issues.
What Happens When You Don't Reconcile?
When accounts aren't reconciled regularly, several problems can develop.
Your books may show the wrong cash balance.
Your expenses may be overstated or understated.
Your accounts receivable may be inaccurate.
Your loan balances may be wrong.
Your financial statements may not tell the full story.
And when tax time arrives, your CPA may have to spend additional time cleaning up the books before preparing your return.
In other words, delaying reconciliation doesn't make the work disappear. It usually makes the work more difficult and expensive later.
How Often Should You Reconcile?
For most active businesses, monthly reconciliation is a good minimum standard.
Businesses with a high volume of transactions may benefit from more frequent review.
For example, a business processing hundreds or thousands of transactions each month may want to monitor cash activity and bookkeeping more frequently.
The key is consistency.
A good monthly bookkeeping process might include:
Downloading or syncing bank transactions
Categorizing transactions
Reconciling bank accounts
Reconciling credit cards
Reviewing accounts receivable
Reviewing accounts payable
Reconciling loans
Reviewing payroll liabilities
Reviewing unusual or large transactions
Reviewing the financial statements
The exact process will depend on the business.
Reconciliation Is About More Than "Making the Numbers Match"
It's important to understand that reconciliation isn't simply a process of forcing your accounting software to match your bank statement.
If your books don't match your bank, you shouldn't simply make an adjustment to make the balance work.
You need to determine why they don't match.
Maybe a transaction hasn't cleared.
Maybe a check is outstanding.
Maybe a deposit is in transit.
Maybe you forgot to record a bank fee.
Maybe a transaction was duplicated.
Or maybe there is a legitimate accounting error that needs to be corrected.
The goal isn't just to make the numbers match.
The goal is to understand why the numbers are different and make sure the accounting records accurately reflect the business.
Don't Wait Until Tax Season
One of the biggest bookkeeping mistakes small-business owners make is treating bookkeeping as something they only need to worry about before filing their taxes.
Your accounting records aren't just for the IRS.
They're a tool for running your business.
When your books are current and reconciled, you can use your financial statements to understand profitability, monitor expenses, manage cash flow, plan for taxes, and make better business decisions.
When your books are six months behind, you lose much of that value.
Your business may have changed significantly since the last time you looked at accurate numbers.
Final Thoughts
Monthly account reconciliation may not be the most exciting part of running a business, but it is one of the most valuable.
Reconciling your bank accounts, credit cards, loans, receivables, payables, and other important accounts helps ensure that your books are accurate and your financial statements can be trusted.
It can help catch errors early, identify potential fraud, improve tax preparation, and give you a clearer picture of your company's financial health.
Most importantly, accurate books give you better information to make better decisions.
If keeping up with monthly bookkeeping and reconciliations has become difficult, you don't necessarily have to do everything yourself.
At Knobbe & Associates, CPA, we help small-business owners keep their books organized, reconciled, and up to date so they can spend less time worrying about their accounting and more time running their businesses.
Your books should tell you what is happening in your business—not leave you guessing.
If you're behind on your bookkeeping or simply want someone else to handle the monthly process, reach out to Knobbe & Associates, CPA to discuss your bookkeeping needs.
