Reconciling Bank and Credit Card Statements
In This Chapter
- Why you should reconcile
- Reconciliation step by step
- Working with automatic reconciliation
- Reconciling a credit card account
- Tracking down transpositions
- When an account won’t reconcile
Reconciling your bank and credit card accounts are some of the most important accounting activities you can perform. And you really can’t reconcile too frequently. You might be surprised how often you can discover transactions—that you haven’t even posted to your accounting records yet—that have affected your bank account already. Keeping a close eye on your bank accounts is one of the best ways to head off fraud or at least minimize the effects of fraudulent activity (more on this in Chapter 15).
In this chapter, you learn the ins and outs of reconciliation. We discuss how frequently you need to reconcile your accounts (more often than you think!) and explain how to prepare for reconciliation. You get an overview of how to reconcile in the leading accounting programs, as well as deal with automatic reconciliation features, when available. The chapter wraps up with information on reconciling credit card accounts, identifying when you’ve transposed digits in entries, and what to do if you simply can’t get an account to reconcile.
Reconciling helps you ensure your accounting records agree with your account records from your bank or financial service provider. A business can have several different types of financial accounts. Virtually every business has a checking account, but some also have business savings accounts. Many have business credit cards as well as accounts for other financial services such as PayPal.
Although your accounting software might give you the impression that reconciling your bank account is a once-a-month activity, it’s not out of the question to reconcile your bank account weekly or even daily if you have access to your account information online.
When you reconcile a bank account, you’re ensuring that any transactions that have posted to your bank account also appear in your accounting records. Further, this allows you to confirm that any transactions in your books that haven’t cleared the bank yet are recent enough you’ll know whether or not to stop payment on a check and reissue it. By reconciling your bank account periodically during the month, you can avoid unpleasant surprises, such as an overdraft fee when you handwrite a check you forget to log into your books, or purchases you make with a business debit card and forgot to post.
Yet another reason to do frequent reconciliations is that, in the event of a bank error, the law favors your bank. If money is debited from your account in error, you have 60 days to protest; however, if the bank makes an error in crediting your account, it has years to correct it.
Reconcile often, and you can catch errors immediately.
Preparing and Reconciling
Successfully reconciling a bank or credit card statement requires attention to detail, so try to choose a quiet time of day. You’ll simply find yourself frustrated, and likely waste your time, if you try to reconcile your account amidst many distractions. However, if distractions are a perpetual state of your existence, don’t defer reconciling your bank account for very long.
You’ll typically only need two things to get started reconciling: your bank statement and access to your accounting software.
Your bank probably mails a paper copy of your statement to you monthly. Different banks use different cutoff dates for sending statements. Some send them near the first of a month for the preceding month, while others might use a mid-month cutoff date. You don’t have to wait for the paper statement, though, if your bank offers access to your statements online.
Your bank might offer a template you can use to reconcile your account on the back or last page of your paper statement. Many banks have dropped this format in the interest of saving paper, but it’s possible your bank still provides it.
Why Reconcile?
Your bank balance isn’t necessarily a good measure of how much cash your business has on hand. Your accounting records usually provide a better measure, but they still might not reflect reality.
Several things can cause differences between your book balance and your bank balance. (In this context, by “book” balance, we mean the balance of your checking account, for example, as shown in your accounting software. By “bank” balance, we mean the amount the bank shows is in your bank account at a particular time.) Maybe you wrote one or more checks that have been taken out of your book balance but haven’t yet cleared your bank, or you posted one or more deposits to your books, but the bank hasn’t yet posted the deposits to your bank account. It could be that you made one or more bank deposits without first entering the amounts into your books. Maybe you handwrote a check and entered the amount of the check incorrectly in your books, you entered a transaction more than once, or someone you’ve authorized to make ACH withdrawals from your bank account posted a transaction you need to record in your books.
In rare instances, your bank may clear a check for an amount that’s different from what you wrote or printed on the check. Or it could have assessed one or more fees you haven’t yet reflected in your books.
Whatever the reason, you need to restore the balance.
DEFINITION
The abbreviation ACH stands for Automated Clearing House, an electronic network most banks are part of. These electronic transactions may be ACH withdrawals or deposits and allow money to be moved around the banking system without any paper. You generally must grant explicit permission for someone to add or remove funds from your account in this fashion. If you have authorized your internet provider to take its monthly fee from your bank account automatically, that’s an ACH transaction.
Reconciliation ensures that your books agree with what the bank shows as your current balance. Here’s how to reconcile your accounts, in a nutshell:
- You’ll mark transactions that match both on your bank statement and in your books as cleared.
- Transactions that don’t yet appear on your bank statement are still in transit, and so you’ll leave those on your books as uncleared.
- If you find transactions that appear in both places but with amounts that don’t match, you’ll make corrections in your accounting software to bring your books up to date. However, banks are not infallible, so if you find an error in your bank statement, it might be best to temporarily change your books to reflect the erroneous amount while you investigate the issue with your banker.
Starting a Reconciliation
Let’s go through an example reconciliation using QuickBooks desktop so you can learn what to look for when reconciling your bank account. Accounting programs vary, but typically a reconciliation command appears on a Banking or Tasks menu. In the case of QuickBooks, we’ll choose Banking and then Reconcile. At this point, a Begin Reconciliation screen appears. It prompts you to select or enter several pieces of information:
Account: If you have multiple accounts, select the account to reconcile from the drop-down list. (You often can select an account before opening this dialog box.)
Statement date: This is the date from your statement. Use today’s date if you’re reconciling to your online bank statement.
Ending balance: On a paper bank or credit card statement, this is simply listed as your ending balance. Online banking statements or current activity reporting may show several balances:
Current Balance: This is the number you should reconcile to. It’s the net amount in your bank account at the present time.
Collected Balance: When you deposit a check into your account, your bank sometimes grants you immediate access to the funds, even though the check hasn’t cleared yet. Even paper checks often clear instantaneously upon deposit, but sometimes transactions may take time to fully clear.
Available Balance: If you wanted to go to the bank and empty your bank account, you’d only be able to withdraw up to the available balance amount, which at certain points might be less than the Current Balance amount.
Service charges: Include any service charges or interest that may have posted to your account since you last reconciled.
Date range: Access to a list of transactions since you last reconciled. This might be a paper statement if you reconcile once a month. If you view your bank statement online, typically you can filter the transactions shown on screen to a specific date range. Limiting what you see to only the transactions you need to focus on can speed up the reconciliation process.
With that information, you’ll complete the corresponding fields in your accounting software.
At a minimum, when reconciling, select an account, specify a statement date, and note an ending balance.
Once you’ve completed the initial fields, click Continue (in QuickBooks; your software might have a different option) to view the actual reconciliation screen.
A reconciliation screen lets you mark the items that have cleared your bank or credit card account.
Keep in mind we’re using QuickBooks desktop to show you examples of a reconciliation screen, so the actual screens in your accounting software might look different. However, no matter what software tool you use, you’ll still need this basic information.
Clearing Transactions
A typical reconciliation screen shows all uncleared transactions. In the case of the desktop versions of QuickBooks, this information is divided into two sets of columns: Checks and Payments and Deposits and Other Credits. Your accounting software might take a different approach. Sage 50, for example, shows all transactions in a single list.
Sage 50 presents a single list of transactions. Your specific software might show two columns.
No matter what software you’re using, a difference amount appears on-screen. This represents the current difference between the ending account balance shown in your books as of the statement date and what your bank reflects as your current balance. The goal of reconciling is to work this difference number down to 0. The difference amount changes every time you mark a transaction as cleared, so don’t panic if the difference appears to fluctuate. Just remember your ultimate goal here is to get the difference down to 0.
To get started, choose the first transaction on your bank statement and then find the corresponding transaction on the reconciliation screen. When you find it, click the Clear column, which might be called Clear or be represented by a checkmark. Repeat this process for each transaction on your bank statement. Remember, you’re making your books agree with the bank, so transactions that appear on your books but not on the bank statement simply haven’t cleared yet or could be an error.
Your accounting software shows an indicator such as a checkmark, a checkbox, or sometimes the letter C to indicate transactions you’ve cleared.
Making Corrections
If you find an error, such as a check that cleared for a different amount than what you have listed on your books, simply double-click on the transaction in the reconciliation screen. Your accounting software should show you the original transaction, as shown in the next example.
There, you can modify any aspects of the transaction, such as amount, date, payee, and so on, and click the Save button to close the transaction. The revised transaction will appear in your reconciliation screen, which you can then mark as cleared.
As part of the reconciliation process, you might discover transactions that have cleared the bank but aren’t yet on your books. Common situations include the following:
- Checks you scheduled for online payment through your bank or wrote by hand but forgot to enter into your accounting software.
- Fees assessed by your bank, such as for submitting a deposit ticket that doesn’t match the total of the accompanying checks.
- ACH withdrawals from a service provider.
- ACH deposits made by customers you haven’t yet posted to your books.
When needed, double-click a transaction within the Reconciliation screen to make corrections.
You can correct any of these situations without leaving the reconciliation screen. To do so, simply use the menu in your accounting software to initiate a new check, deposit, or journal entry as needed to record the missing transaction. When you close the transaction window, you should be returned to your account reconciliation window.
In some cases, the software might inform you that you’ll need to save the reconciliation as is in order to add a new transaction. Simply accept that option, and when you return to the reconciliation window, you’ll be able to pick up where you left off.
Tips for Successful Reconciliations
One of the biggest challenges of reconciling a bank account, particularly one with lots of transactions, is combating the “blur.” As you compare the many numbers and columns on your statement to the reconciliation window, it won’t take much for your eyes to glaze over.
To help with this, most modern accounting programs allow you to sort columns within reconciliation windows. Simply click a column heading, such as Amount, to sort the transactions in ascending amount order (smallest to largest). Click the column heading a second time to sort in descending order (largest to smallest). Every column within the reconciliation window should be clickable and, therefore, sortable. Click the Date column to return items to Date order.
If your reconciliation takes several screens to view, you might be able to zero in on an out-of-balance amount by sorting on the dollar amount column. You often can sort by payee or check/reference number as well.
All the scrolling and clicking involved with reconciling a bank account can quickly become tedious. You’ll likely be relegated to using your mouse with cloud-based programs such as QuickBooks Online, but there’s an easier way in desktop-based accounting software. Within the reconciliation window, you can use the up or down arrow keys on your keyboard to navigate the list and then tap the spacebar on your keyboard to toggle between marking an item cleared or uncleared.
Finally, as much as you might hope to, you won’t always be able to finish your reconciliation in a single sitting. Anticipating this, your accounting software lets you save your work in progress. Depending on the software, you might see a Leave or Finish Later button. If you don’t see a button like this, simply close the reconciliation window and a prompt should appear asking if you want to save your work.
Automated Reconciliations
Depending on the accounting software you use, you might be able to have your software automatically reconcile your bank account for you. Once you grant permission for your software to connect to your bank account over the internet, at your request, it can synchronize transactions from your bank account with your accounting records, automatically clearing any matches.
Anything that doesn’t match is left on-screen for you to decide how to handle.
Unmatched transactions could be items that cleared your bank account before you entered them into your accounting software. Or, maybe you inadvertently entered the same transaction more than once in your accounting software. If this happens, you can simply delete or void the duplicate transaction.
Cloud-based accounting packages may allow you to reconcile your statement on your mobile device, although this can be a tedious exercise unless you have both a large screen and a paper copy of your statement.
RED FLAG
Automated bank reconciliation can feel like being liberated from a tedious task, but there’s much value in being forced to sift through your transactions. By clearing each transaction individually, you can easily notice any amounts that seem out of scale for your business. And if you take a hands-off approach to reconciling your bank account, you might miss fee increases or changes in recurring charges that over time can eat away at your bottom line.
Reconciling Credit Card Statements
By this point, we hope you can see the importance of reconciling your bank account. Reconciling credit card statements is equally important because recurring charges can slowly erode your line of credit. (Plus, these should be reflected as expenses on your books.) For the most part, the process of reconciling your credit card statements is the same as for your bank accounts.
However, we do want to point out one difference. When you’re reconciling your bank statement, ideally your bank balance is always above 0, so you enter positive numbers. However, if you’re reconciling to a non-0 balance on your credit card statement, such as $5,000, in some programs, you’ll enter 5,000, but in others you might need to enter –5,000.
QuickBooks, for example, enables you to enter the balance as you see it on your bank statement. Other programs more suited to users with an accounting background, like Sage 50, expect you to enter the balance as a credit amount, hence the minus sign in front of the number.
Remember, your financial statements are only as accurate as the work you put into them, which means a sizeable amount of your financial activity could be left off your books if you don’t reconcile your credit card statements. Further, your income tax bill could be higher than necessary at the end of the year if you’ve neglected to reflect every expense incurred by your business.
Identifying Transpositions
The goal of reconciliation is to get that unreconciled difference down to 0. However, you might find that you can’t get the unreconciled difference down to 0 and you’re off by an inexplicable amount. Fortunately, accountants and bookkeepers have long relied on a trusty technique: divide the discrepancy by 9. If the discrepancy divides evenly by 9, then most likely you’ve transposed two digits because the difference between numbers with transposed digits is always divisible by 9.
For example, you meant to enter $45.54 but you inadvertently posted it as $45.45. The difference between $45.54 and $45.45 is 9 cents, which is evenly divisible by 9. This could cause a 9 cent unreconciled difference.
Once you suspect a transposition, you have to track it down. That requires you to double-check the amount of each transaction. We share one way of doing this in the next section.
RED FLAG
Don’t assume you can skip reconciling accounts that don’t have much activity. If you have a business savings account where you squirrel away money for a rainy day, be sure to reconcile it at least once a month, even if you haven’t touched the account for a while. The odds of recovering money unexpectedly taken from your account drop precipitously with each passing day.
One of the best favors you can do yourself is knowing when to take a break, and that’s especially true when you’re working on a computer. Transactions on a reconciliation screen can blur together so easily, you might not be able to see the obvious solution right in front of you.
Remember, reconciliation isn’t something that has to be performed in a single sitting. Most accounting software offers a Postpone or Leave Reconciliation option so you can exit and save your work for later. Many times, when you come back the next day with fresh eyes, that missing transaction or transposed amount jumps right out at you.
However, if you have a particular reconciliation you just can’t seem to clear up on-screen, it’s time to go old school.
Print your bank statement, reset all the transactions in your accounting software to uncleared, and work through your bank statement, putting a checkmark next to each item you clear on-screen. It can be a slow and laborious process, but it’s a proven way to find the discrepancy in your reconciliation.
From time to time, the issue causing you to be unable to reconcile your account could be lurking in a prior month. Before you start reconciling your current month’s bank statement, run a report for the previous month to ensure the reconciled difference is still 0. In some cases, you might have to work your way back several months. If you modify a previously cleared transaction, such as to fix an accounting error, it can turn uncleared. This can cause a domino effect on all subsequent accounting periods.
If all else fails, simply start over. If you haven’t saved the reconciliation yet, click the Cancel button or leave the window and choose No when asked if you want to save your work. If you’ve saved your work already, unmark any transactions you’ve cleared and start over from the top. The answer is always there, somewhere between your bank statement and your books, so it’s a matter of getting the proper perspective so you can see any issues that have been eluding you.
Your paper-based bank statement contains information that can help as well. You’ll notice that the reconciliation window in your accounting software shows totals of cleared Deposits and Withdrawals. The terminology might vary, but there should be a section on your screen that lists this information. Compare this to the Total Deposits and Total Withdrawals listed on your bank statement. In some cases, you might have to add two or more amounts together, such as Checks and Other Withdrawals, to get to Total Withdrawals. In any case, if you can’t reconcile and you find that at least the Total Deposits shown on the screen matches your bank statement, you know the remaining difference is somewhere among the checks and withdrawals.
Successful reconciliations are a process of elimination, and anything you can do to limit the scope of your scrutiny will help you finish the reconciliation faster.
Reconciling your accounts is one of the most important accounting activities you can carry out. Not only does reconciling help you keep a close eye on your cash balance, it also ensures that your financial statements present an accurate picture of your business. It’s easy to forget to post recurring charges, such as health insurance premiums, that charge automatically to a credit card. Reconciling your credit card statements helps ensure all your expenses are listed in your books. Plus it helps you avoid overlimit fees, rejected credit card charges, and other problems that can arise from an account left unattended from periodic financial scrutiny.
The Least You Need to Know
- Reconciling helps you ensure that your accounting records agree with your account records from your financial service provider and should be performed monthly, at the least.
- After you gather your statement and transaction records, you can step through the reconciliation process in your accounting software and correct any discrepancies.
- Reconciling your credit card account helps you clear errors and note any fee changes that may erode your business’s bottom line.
- If a reconciliation discrepancy divides evenly by 9, then most likely you’ve transposed two numbers in a transaction.
- You can resolve a discrepancy by starting over and comparing each transaction. Comparing Total Deposits and Total Withdrawals between your bank statement and the software reconciliation window can help you narrow down where the discrepancy might be.