Bank Reconciliation: What it is and How it Works

Reconciling a bank account is the process of making sure the balance of a bank account in your books matches the actual balance from your bank/financial institution. Bank reconciliation is important because if there is a discrepancy, you will need to find the cause and make an adjustment to your books so that your financial statements are accurate.

Traditionally, bank reconciliations are done on a monthly basis once statements have been issued by the bank. However, most cloud accounting software programs like Zoho Books allow you to connect your bank accounts so that you can automatically download your banking transactions to your accounting software on a daily basis.

In this article, we will explain how bank reconciliation works, and show you how to complete one using accounting software. We’ll be using Zoho Books, a leading online accounting software, as an example. We’d like to thank Zoho Books for sponsoring this article.

What is Bank Reconciliation?

To ensure that all deposits and withdrawals from your bank account have been recorded in your accounting records, you must compare each transaction that appears on your bank statement to what has been recorded in your accounting software. If you do find a discrepancy, you must make the adjustment to your accounting records or notify the bank if the error is on their end.

What are the Benefits of Reconciling Bank Accounts?

Whether you review your banking transactions while having that first cup of coffee each day or carve out 30-45 minutes each week or month, investing that time will pay off. Here are some of the benefits of reconciling your bank accounts regularly:

1. Makes Tax Time a Breeze

By reconciling your bank account on a regular basis, you will ensure that all of your day-to-day business expenses paid with a debit card or check have been recorded in your accounting software. Instead of dreading tax time because you have 12 months worth of transactions to reconcile, your financial statements will be completely up to date. With accounting software like Zoho Books, you can give your accountant access to your data so that they can run financial statements and access any other info that they need to prepare your tax return without having to bother you.

2. Detect Fraud or Discover Other Issues Sooner

We spoke with Heather Robinson, Director, Online Banking Product Manager Digital Channels at Union Bank who shared the following with us:

“Business owners generally have in their head an expected balance of their account. Doing a quick daily check on the actual balance is a great way to detect fraud or identify check clearing or deposit issues. Doing this makes the monthly reconciliation process a breeze, because issues are usually discovered right away.

Small businesses that use online accounting software have the benefit of data from their online bank accounts automatically loading into their software. In their daily balance checks they can not only monitor for fraud but clear transactions so the end of month reconciliation is a breeze.”

3. Know Where your Money is Going

Believe it or not, reviewing your bank statements will tell you a lot about your spending habits. Whether it’s looking at how much money you spend on shipping products to customers or the occasional coffee and donuts run for the office. It all adds up. While you may not be able to put a price on the employee morale that the coffee and donuts bring, you could talk to your shipper to negotiate a better price for shipping products.

Another area that people don’t realize adds up quickly is bank fees. How many times do you get cash from an ATM that is not your bank? Each time you do this, you are charged a fee by the company who provides the ATM service and your bank also charges a fee. These fees can run anywhere between $2.50-$5.00 per transaction. If you are doing this at least twice per week then you will have paid between $20-$40 easily in a month’s time! While that might seem like chump change to you, how about giving away $240-$480 in a year’s time! Do I have your attention now?

Reconciling your bank account will give you access to detailed income and expense reports so that you can keep an eye on these type of expenses before they get out of hand. In the long run, having this information will allow you to make better business decisions that can have a positive impact on your bottom line.

Compare Receipts to your Bank Statement

Before we discuss the step-by-step approach to reconciling your bank account within an accounting software program like Zoho Books, there is a “manual” reconciliation that needs to take place first. This process involves that wad of receipts that you’ve got hidden in the glove box of your car or maybe even a shoebox. It’s very important for you to compare your receipts with the charges that appear on your bank statements. You want to make sure that the amount that you authorized for payment is in fact what you paid.

With increased identification theft In today’s world, it’s important to take precautions when reviewing transactions. Earlier, we discussed the benefits of detecting fraudulent transactions sooner rather than later. However, there is also the possibility of a transaction that clears your bank account for a different amount than what you authorized. Ever heard of tip fraud? This is when a waiter/waitress changes the tip amount line.

While it’s never happened to me personally, I can tell you that it is a real thing. After reading Tales of the Tip: Patrons and Waitstaff Dish Tipping Fraud, I learned that if I ever leave a cash tip, always write “cash” or “none” on the tip line as opposed to just leaving it blank.

One way to streamline this is to use Zoho’s auto-scan feature. This feature allows you to upload, drag & drop, or email documents like receipts, bills and deposit slips to Zoho Books. Then, during reconciliation, you can quickly match these transactions with downloaded banking transactions. This will allow you to catch any discrepancies you may have missed if you hadn’t reviewed the original receipt or document. It also makes tax time a breeze, since your receipts are organized all in one place.

Info/Documents to have handy when reconciling Bank Accounts

Before you begin reconciling a bank account, you will need to have the following info/documents handy:

• Your user ID and password used to access your bank account online.
• An electronic or hard copy of bank statements for the time period you are reconciling.
  Note: Most banks allow you to download your statements as PDF documents so that you can refer to them as needed.
• An electronic or hard copy of all canceled checks. Similar to bank statements, most banks allow you to access a copy of checks that have cleared the bank online. This will help you to determine payee, amount and items purchased so that you can easily categorize expenses.
• An electronic or hard copy of all receipts. This will also help you to categorize expenses as you review them. If you need help with organizing your receipts, check out our recommendation for the best receipt scanner app. In this guide, we compare the top 3 apps that can help you get rid of those paper receipts!

Note: Before you begin reconciling, you should make sure all of your transactions have been entered into your accounting software, including receipts, bills and invoices. While you can technically enter them as you reconcile, this is time consuming and can make it more difficult to catch errors.

How to Reconcile a Bank Account Using Zoho Books

Below is a video along with step by step instructions on how to reconcile your bank account using Zoho Books.

Step 1 – Establish a Bank Feed between your bank account and Zoho Books.

There are 3 ways to connect your bank account to Zoho Books:

1. From the dropdown above, type the name of your bank in this field and select it.
2. Select from the list of popular banks by clicking on the icon that represents your bank/financial institution as indicated in the screenshot above.
3. If you cannot locate your bank from the dropdown or in the list of popular banks, click on the “Enter your account manually” button and follow the on-screen instructions to import your bank statements.

Step 2 – Log into your Bank Account.

Enter your online ID and passcode in this screen. Once you have done so, click the “Continue” button as indicated in the above screenshot.

Step 3 – Select the Bank Accounts to establish a Bank Feed.

1. Select your accounts – All of the bank accounts that you have at the financial institution you selected in step 1 will be listed here. Put a checkmark next to each account that you would like to establish a bank feed for.
2. Download transaction history from – From the drop down calendar, select the date that you would like to go back and download transactions for.
   Note: You can go back 90 days in Zoho Books. If you need to go back further than that, you will need to import the bank statements for anything older than 90 days.

Example: Let’s assume that it’s April 16th and your tax professional has told you if you bring in a shoebox next year, the fee will be double! So you vow to start using Zoho Books immediately. In order to get all of your banking transactions that have occurred since January 1st into Zoho Books, you can import your January bank statement and then use Feb 1, 2017 as the date you will download transaction history.

3. Select Currency – One of the benefits of using Zoho Books is you can easily track both foreign bank and credit card accounts! From the dropdown, select the appropriate currency for the bank account you are setting up.
4. Click the “Continue” button once you have made all of your selections.

Step 4 – Banking Overview

Once you have set up the bank feed, your bank accounts will be listed in the banking overview section as indicated in the above screenshot. Here is a brief explanation of the info you will find here:

1. Account Details – In this column, you will see the following info:
   1. Name of the type of bank account (i.e. Business checking)
   2. Last four digits of the bank account number (not shown here to maintain privacy)
   3. Date the latest transactions were downloaded. (i.e. May 15, 2017)

2. Uncategorized – In this column, you will find the number of transactions that you need to review and categorize to the appropriate income or expense account.

Note: If you have already entered some of your banking transactions in Zoho Books, then you will also have a column that says “Recognized”. This means that Zoho has matched a transaction that you entered manually with one downloaded from your bank.

3. Pending Checks – This column will reflect checks that you have created in Zoho Books but have not printed.
4. Amount in Bank – This is the balance in the bank account as of the last update.
5. Amount in Zoho Books – This is the current balance in the bank account per Zoho Books.

Note: The goal of this reconciliation process is for the amount in the bank to equal the amount in Zoho Books.

Step 5 – Categorize Transactions

Follow the steps below to assign an account to the uncategorized transactions.

Step 5.1 – Display the transactions

For the appropriate bank account, click on the uncategorized transactions as indicated in the screenshot below.

Step 5.2 – Determine the number of transactions per page

Scroll down to the very bottom of the page and you will see an option to select the number of transactions you would like to see per page as indicated below.

Step 5.3 – Start with the “oldest” transactions first.

Scroll down to the very bottom of the page and to the right of the number of transactions per page, you will see an arrow. Click that arrow until you cannot go any further. The most recent transactions appear first and as you go to the next page the transaction dates get older.

Step 5.4 – Click on the first transaction you want to categorize and the following window will display.

1. Category – From the dropdown, select the type of transaction. The options you have to choose from are as follows:
   1. Expense
   2. Vendor Advance
   3. Vendor Payment
   4. Transfer to another account
   5. Sales return
   6. Card payment
   7. Owner draw
   8. Credit note refund
   9. Payment refund
2. Expense Account – From the dropdown, select the appropriate account. If the account is not set up, you can set it up by selecting “+New Account” from the dropdown.
3. Vendor (Optional) – Select the appropriate vendor from the dropdown, if the vendor is not set up you can set it up by selecting “+New Vendor” from the dropdown.
4. Date – Enter the date of the transaction.
5. Amount – This field will automatically populate with the amount downloaded from your bank.
6. Reference# (Optional) – Enter any additional info about this transaction (i.e. purchase order#).
7. Description – This field will automatically populate with the description downloaded from your bank. You can change the description or delete it altogether.
8. Attach Receipt – Zoho Books allows you to attach receipts directly to the transactions they are associated with. Simply scan your receipt to your computer and attach it here.
9. Customer – If the transaction is related to a customer, select the customer from the dropdown. If the customer has not been set up, you can add a new customer by selecting “+Add New Customer” from the dropdown.
10. Save – Be sure to save your changes.

Once you have categorized all transactions downloaded from your bank/financial institution, the amount in Zoho Books should match the amount in the bank account.

As mentioned previously, you can reconcile as often as you like since any new transactions will download daily. When you receive your bank statement at the end of the month, it will be a breeze to reconcile if you have already categorized your banking transactions throughout the month.

Here are the steps you should take to complete the monthly bank reconciliation.

Step A – From the Banking Overview, click on the account that you would like to reconcile as indicated in the screenshot below.

Step B – In the next screen, click on the gear icon located to the far right of the screen and select “Reconciliation History” as indicated in the screenshot below.

Step C – Click the “Reconcile Account” button as indicated in the screenshot below.

Step D – Using your bank statement, complete the following fields as indicated in the screenshot below.

1. Start/End Date – Enter the beginning and ending statement period in these fields. Note: If you are reconciling more than 1 month, then be sure to use the beginning date of the first month and the ending date of the last month that you are reconciling.

Example: Let’s say that you have gotten behind on completing your reconciliations so you decide to reconcile 3 months at one time. If you are reconciling January, February and March then your beginning/ending date will be as follows:

Start Date: January 1, 20XX
End Date: March 31, 20XX

2. Closing balance – Enter the ending balance from your statement. This will be the balance in the bank account as of the end date.
3. Start Reconciliation – Once you have completed all of the fields, click the “Start Reconciliation” button.

Step E – In the next screen, you will see a list of all transactions that were downloaded and categorized in Zoho Books. Below is a screenshot and a brief explanation of the info here.

1. Date – This is the date of the transaction.
2. Transaction Details – This is the account that you categorized the transaction to.
3. Type – This is the type of account you selected for transaction details along with the name of the vendor (if applicable).
4. Deposits – All deposits to the account will appear in this column.
5. Withdrawals – All withdrawals to the account will appear in this column.
6. Clear – This column represents items that were downloaded from the bank which means that they have essentially “cleared” your bank account.

Step F – Scroll down to the very bottom of the screen and you will see the following key fields as indicated in the screenshot below.

1. Closing balance – This is the ending balance that you entered earlier from your bank statement.
2. Cleared Amount – As discussed previously, this is the total amount of all transactions that were downloaded to Zoho Books from your bank.
3. Difference – The difference between the closing balance and the cleared amount is calculated as the difference. The goal is to get to a difference of 0.00 as we have here. Note: If you do not have a 0.00 balance here, refer to our tips for reconciling bank accounts section for assistance.
4. Add Transaction – If you realize there are missing transactions that you need to enter, you can do so by clicking the “Add Transaction” button which will allow you to add the missing transactions to Zoho Books.
5. Attach File(s) – You can attach a copy of your bank statement, cleared checks, receipts or other supporting documents here for future reference.

Step G – Right below the comparison of the Closing balance to the Cleared Amount fields, are the following options per the screenshot below.

1. Save and Reconcile Later – As I mentioned in the Tips for reconciling accounts section, you will come to appreciate this button. If you are interrupted or out of balance and need a break, you can save the work that you have done and pick up where you left off by selecting the “Save and Reconcile Later” button.
2. Reconcile – You only want to click this button if your difference is 0.00. If your balance is not 0.00, refer to the tips on reconciling bank accounts for assistance. Note: Zoho Books will not allow you to proceed with the reconciliation until the difference is 0.00.
3. Cancel – Click this button if you don’t want to save your work and you plan to start over from scratch.

Step H – Once you click the “Reconcile” button, you should see the following Reconciliation History screen as indicated in the screenshot below.

Note: If you select the Save and Reconcile Later button, the status will be “In Progress” until you complete the reconciliation.

Note: If you accidentally click the Reconcile button you can undo a reconciliation by clicking the Undo Reconciliation button as indicated in the screenshot below.

5 Tips for Reconciling Bank Accounts

If you’re having trouble getting to a 0.00 difference between what’s in Zoho Books versus your bank statement, try some of these troubleshooting tips:

Tip #1: Make sure that each transaction listed in Step E above has a checkmark in the far right column marked Clear. If a transaction does not have a checkmark it is not included in the cleared amount totals in Step F above.

Tip #2: The difference could be one transaction so look for the exact dollar amount that you are off. For example, if your difference is 42.00 then look at your bank statement to see if there is one item for this amount and if not check the transactions recorded in Zoho Books.

Tip #3: Make sure that every transaction on your bank statement has been recorded in Zoho Books. Any transactions that are listed on your bank statement but do not appear in Zoho Books will cause you to be out of balance and vice versa. You will need to add the transaction to Zoho Books and then proceed with the reconciliation.

Tip #4: Unless you don’t have a lot of transactions, I would not recommend reconciling more than one month at a time. The more transactions you have to reconcile the higher the chances are that you will have a difference. Locating an out of balance will be that much harder to find if you have to look thru 2 or 3 months worth of transactions as opposed to just 1.

Tip #5: If you have a difference greater than $1.00 and you have not been successful with figuring things out, I suggest that you start the reconciliation over. You can do this at anytime by clicking the Cancel button in Step G above.

The Bottom Line

By now you should have a better understanding of how reconciling your bank accounts can help you to stay on top of the cash coming in and going out of your business and make tax time a breeze,

Remember to keep the following tips in mind to make this process as smooth as possible:

• Organize & store receipts in the cloud using a receipt scanner app.
• Invest in an accounting software like Zoho Books so that you can connect your bank accounts and automatically download & categorize transactions as often as you like.
• Compare receipts to the bank statements to ensure only transactions that you have authorized are being deducted from your bank account.