How to Do Bank Reconciliation: Steps for Accurate Books

Published Friday 9 January 2026

Table of contents

• What is bank reconciliation?
• Why bank reconciliation matters
• How often should you do bank reconciliation
• How to do bank reconciliation step by step
• How to use bank reconciliation software
• Bank reconciliation problems and solutions
• Streamline your reconciliation process
• FAQs on bank reconciliation

Key takeaways

• Establish a consistent reconciliation schedule based on your transaction volume (daily or weekly for high-volume businesses like retail, monthly for businesses with fewer transactions) to keep the task manageable and catch issues early.
• Compare each bank deposit with income entries in your books and each withdrawal with expense entries, investigating any discrepancies such as timing differences, bank fees, or data entry errors immediately.
• Utilise accounting software with automated bank feeds to eliminate manual comparison work, as these tools can automatically match transactions and provide smart suggestions while reducing human errors.
• Start each reconciliation from your last successful matching point and work chronologically through new transactions to ensure accuracy and maintain this end balance as the starting point for your next reconciliation.

What is bank reconciliation?

Bank reconciliation is the process of matching the transactions in your business's books with those on your bank statement.

Think of it as a regular health check for your finances. It helps you confirm that the numbers you have are accurate, spot any differences, and maintain a clear picture of your cash flow.

Why bank reconciliation matters

Regular bank reconciliation isn't just about ticking a box. It gives you confidence in your financial data. By keeping your books and bank in sync, you can:

• track your cash flow accurately
• spot potential issues like bank errors or fraudulent transactions early
• make smarter business decisions based on real-time information
• simplify tax time with clean, reliable records

How often should you do bank reconciliation

The best frequency for bank reconciliation depends on your business's transaction volume.

• Daily or weekly: Ideal for businesses with many transactions, like retail or food services. Frequent reconciliation keeps the task manageable, helps you monitor cash flow closely, and simplifies the handling of specific records like cash register tapes, which have specific retention rules.
• Monthly: A common choice for businesses with fewer transactions. It aligns with when you receive your monthly bank statements.

The key is consistency. The more often you reconcile, the quicker it is to spot and fix any issues.

How to do bank reconciliation step by step

Bank reconciliation compares your business records against your bank's records to verify accuracy. This process helps you:

• Catch errors: Identify mistakes in your books or bank statements
• Prevent fraud: Spot unauthorised transactions quickly
• Maintain accuracy: Ensure your financial reports reflect reality
• Improve cash flow: Know exactly how much money you have available

1. Get bank records

Gather these bank records:

• Bank statements: Download from online banking or request paper copies
• Credit card statements: Include all business credit accounts
• Transaction lists: Export directly from your bank's website
• Automated feeds: Set up direct data transfer to your accounting software

2. Get business records

Collect your business records:

• Accounting software: Access your digital ledger and transaction history
• Spreadsheets: Open your Excel or Google Sheets financial records
• Physical records: Gather logbooks, receipts and invoices
• Automated data: Use software that captures bills and receipts automatically

3. Find your starting point

Find the last date when your business records matched your bank balance exactly. This becomes your reconciliation starting point because it ensures you're only checking new transactions since your last successful reconciliation.

4. Run through bank deposits

Make sure each deposit appears as income in your accounts. If something is missing, enter it. You'll need to figure out if it was a sale, interest, a refund, or something else.

5. Check the income on your books

Each entry should match a deposit on your bank statement. If something is missing, find out why. A customer payment might have bounced, for example.

6. Run through bank withdrawals

All bank withdrawals should be recorded in your books. This includes things like bank fees, which you might not have accounted for yet.

7. Check the expenses on your books

Each entry should match a withdrawal on your bank statement. If not, find out why. One of your payments may not have cleared yet, or maybe you paid using cash or a different account.

8. End balance

After you've checked all the deposits and withdrawals, your business bank balance should match the totals in your business accounts. This will be the starting point for your next reconciliation.

Check out Xero's bank reconciliation features.

How to use bank reconciliation software

Automated bank reconciliation eliminates manual comparison work and saves significant time. Modern accounting software offers:

• One-click matching: Automatically pairs transactions between records
• Smart suggestions: Identifies likely matches for your review
• Real-time updates: Syncs bank data directly into your accounting system
• Error reduction: Minimises human mistakes in data entry

Most banks can send transaction data directly to accounting software, like Xero, through a secure online connection. When you're ready to reconcile your bank transactions, the software pulls up each bank transaction in turn and either:

• suggests a match with a corresponding entry in your accounts, or
• asks what the transaction was for and enters the information into your accounts

Bank reconciliation problems and solutions

Discrepancies are normal during bank reconciliation and usually have simple explanations. Common reasons for mismatched transactions include:

• Timing differences: Cheques written but not yet cleared
• Bank fees: Charges that haven't been recorded in your books
• Outstanding deposits: Money banked but not yet processed
• Data entry errors: Typos in amounts or transaction details

When your business books show transactions not on your bank statement

If a transaction isn't showing on your bank statement, it's most likely because you got income that you didn't bank, or you paid for something out of a different account or with cash. Get to the bottom of it and make the necessary notes.

When your bank statement shows transactions not in your business books

If a transaction isn't showing in your business books, it could be from a keystroke error when you entered a transaction. Or it could be a transaction that you forgot to enter. Make the required corrections or updates.

Tips for faster problem resolution

Resolve discrepancies faster by reconciling more frequently:

• Weekly reconciliation: Reduces mystery transactions and saves investigation time
• Daily reconciliation: Keeps transactions fresh in your memory
• Consistent timing: Block calendar time for uninterrupted reconciliation
• Document organisation: Maintain easy access to invoices, receipts and transaction records
• Systematic approach: Check transactions in chronological order to spot patterns

Streamline your reconciliation process

Keeping your books in order doesn't have to be a chore. An efficient bank reconciliation process gives you a clear, up-to-date view of your finances, freeing you up to focus on what you do best: running your business.

With smart tools that automate the heavy lifting, you can save time, reduce errors, and manage your money with confidence. Ready to make reconciliation easy? Try Xero for free.

FAQs on bank reconciliation

Here are answers to some common questions about bank reconciliation.

What is the bank reconciliation formula?

There isn't one single formula, but the goal is to make your book balance match your bank balance after accounting for outstanding items. The process involves adjusting for things like deposits in transit and outstanding cheques to ensure both records align.

How do I reconcile a bank account in Xero?

In Xero, you can connect your bank account via a secure feed. Transactions appear in Xero, where the software suggests matches to your invoices and bills. You just need to review and click 'OK' to reconcile.

What should I do if my balances never match?

If your balances consistently don't match, start by checking for data entry errors. Look for transposed numbers or missed transactions. If you're still stuck, it might be a good time to ask your accountant or bookkeeper for help.

How far back should I go when starting reconciliation?

If you're starting from scratch, it's best to go back to the beginning of the financial year to ensure your records are accurate for tax purposes. Furthermore, the ATO requires that banking records must be kept for 5 years, so ensuring your initial reconciliation is thorough is crucial.

Is daily reconciliation better than monthly?

It depends on your business. Daily reconciliation is great for high-volume businesses as it keeps the task small and manageable. For businesses with fewer transactions, monthly reconciliation is often sufficient. The most important thing is to choose a schedule and stick to it.