Concepts
Reconciliation
Reconciliation is the process of comparing your accounting records with an outside source, usually a bank statement, to confirm that they match and to find any errors or missing transactions.
Reconciliation means checking that two sets of records agree. In small business bookkeeping, the most common example is bank reconciliation, where you compare the transactions in your accounting software with those on your bank or credit card statement. Every deposit and payment on the statement should have a matching entry in your books, and the closing balances should agree after allowing for items such as uncleared cheques.
The purpose is accuracy. When you reconcile, you find transactions you forgot to record, entries that were made twice, amounts typed incorrectly and payments that went to the wrong account. You can also spot unauthorised or unexpected transactions, such as fees or fraud. Doing it regularly, often monthly or even weekly, keeps the task manageable and means problems are caught while you still remember the details.
Reconciliation is closely connected to GST. When you code a bank transaction in your software, you choose a GST treatment for it. If this is done carelessly, the GST figures in your BAS will be wrong. A thorough reconciliation includes checking that each transaction has the right tax code, that the supporting tax invoice is attached or held for purchases above $82.50 including GST, and that no private spending has been claimed as business.
Other accounts can be reconciled too. You can reconcile the accounts receivable list to your customer statements, the accounts payable list to supplier statements, the GST accounts to your BAS, and the payroll and super liability accounts to the amounts you have reported and paid. Each reconciliation tests a different part of the records. Differences should be investigated and corrected, with adjustments recorded using clear journals.
Reconciliation also forms part of your evidence in a review or audit. Being able to show that your records tie to bank statements and that each BAS figure agrees to your ledger builds credibility. Records generally need to be kept for five years. Many accounting packages automate part of the process with bank feeds and matching rules, but the owner or bookkeeper still needs to review the matches rather than accept them blindly.
A common misunderstanding is believing that a bank feed means the books are reconciled. A feed only brings in transactions. Someone still has to code them correctly and confirm they agree to the statement. Another is forcing a balance by adding an unexplained adjustment. This hides errors. If a difference remains, investigate it. This is general information only, so confirm how this applies to you with the ATO or a registered tax professional.
Worked example
At 31 March, a shop's bank statement shows $18,420. Her books show $17,950. She finds an uncleared supplier payment of $620 and a customer deposit of $150 not yet recorded in the books. Adjusting: $17,950 plus $150 is $18,100, and the statement balance less the $620 uncleared payment is $17,800. A $300 difference remains, which she traces to a duplicated bill entry.
Practical tips
- Reconcile every bank and credit card account at least monthly, and always before preparing your BAS.
- Check the GST code on each transaction while reconciling, not only the amount.
- Never plug a difference with an unexplained adjustment. Investigate the cause.