Bank reconciliation in plain English

Reconciliation is the dullest word in bookkeeping and the most important one. It means comparing two sets of records and making sure they agree. In practice, it usually means this: the balance your accounting software shows for your bank account should match the balance your bank shows, and you should be able to explain every cent of the difference.

Here is how it works. Your bank gives you a statement for the month. The statement shows every deposit, every withdrawal, and the ending balance. Your accounting software also shows a balance for that account. If the two match, great. If they do not, you find out why.

Most differences fall into a few buckets. A transaction is in your software but not on the bank statement yet, maybe a check you wrote has not cleared. A transaction is on the bank statement but not in your software, maybe a fee or an interest payment you had not entered. Or something was entered for the wrong amount. Reconciliation is the process of walking through those one by one until the two balances agree.

Why does it matter? Because without it, the balance in your software is just a number you typed. You do not know if it is right. A reconciled balance is a checked balance: it has been measured against the bank, and the differences have been explained. That is the only kind of number you can make decisions from.

Reconciliation is also how you catch mistakes early. A duplicate transaction, a charge you did not make, a deposit that came through twice: all of these show up as a difference during reconciliation, usually within a few weeks of when they happened. The longer you wait, the harder they are to remember and fix.

A common worry is that reconciliation requires sharing your bank password. It does not. Bank feeds connect through your accounting software, and the connection is read only. We can see the transactions, but we cannot move money, and we never ask for your online banking password.

We reconcile every account every month: checking, savings, credit cards, and any merchant or payment processor accounts that carry a balance. By the time the month closes, every account has been matched to a statement, and the differences are zero. That is what we mean when we say the books are reconciled.

If your books are months behind, reconciliation is also the cleanup tool. We go back month by month, reconcile each one, and work forward to the present. It is slow, methodical work, but it is the only way to get to a balance you can trust.

Reconciliation is not glamorous, and it will never be the most exciting part of running a business. But it is the part that makes every other number in your books mean something.