Reconciliations

A reconciliation compares a balance in your books with the same balance in a record kept by someone else, explains every difference, and corrects the books where they are wrong. It is the main way to find the errors a trial balance cannot see: entries that are missing or duplicated, and amounts posted to the wrong account.

What a reconciliation proves

When the bank account reconciles, two independent records agree on how much cash the business has. The bank recorded its side from deposits and cleared cheques; the business recorded its side from its own entries. If the two agree after accounting for timing, the cash balance on the balance sheet is supported by evidence the business did not create.

Reconciliations also expose fraud and theft, which is why lenders and auditors look at them first. A cheque the business never wrote, a card refund nobody authorized, or a deposit that never reached the bank all show up as unexplained differences.

The bank, two-sided

The standard bank reconciliation adjusts each side separately to the true balance.

Start from the bank statement balance and adjust for items the bank hasn't recorded yet:

• Add deposits in transit: money recorded in the books but not yet on the statement.
• Subtract outstanding cheques and payments: amounts recorded in the books that haven't cleared.

Then start from the book balance and adjust for items the business hasn't recorded yet:

• Subtract bank charges, returned cheques and other deductions found on the statement.
• Add interest earned and direct deposits found on the statement.
• Correct any errors in the books.

The two adjusted balances must be equal. Only the adjustments on the book side need journal entries. The bank-side items will clear on their own next month, and if they don't, they need investigating.

Timing items and errors

Most differences are timing items, and they clear within days. Any item that does not clear within a month or two deserves a closer look. An outstanding cheque from four months ago may have been lost, or may have been voided without a matching entry. An old deposit in transit usually means a deposit was recorded and never made.

Errors are the other category. A cheque recorded as $450 that clears for $540 is a transposition, and the book side needs a $90 correction. Transposition errors leave a difference divisible by nine, a quick test worth remembering.

Beyond the bank

Every balance sheet account should be reconciled to something at each close. For a small business, the main ones are:

• Card processor clearing: sales recorded against deposits received, with fees as the difference.
• Credit cards: the statement against the ledger, like a bank account.
• Accounts receivable: the customer subledger total against the ledger account, with an aging report.
• Accounts payable: the supplier subledger total against the ledger, and large supplier balances against supplier statements.
• Payroll liabilities: amounts withheld and owed against remittance records.
• Sales tax: tax collected and paid against the returns filed.
• Loans: the ledger balance against the lender's statement.
• Fixed assets: the register against the ledger, cost and accumulated depreciation separately.

Evidence and sign-off

A reconciliation is only useful if someone else can follow it. Each one should show the date, the two balances, a list of reconciling items with dates and references, the preparer's initials and the reviewer's initials. File it with the statement it reconciles to. The CRA and the IRS both expect businesses to keep supporting records; a monthly reconciliation file makes those records easy to produce if they are requested.