What is bank reconciliation?
Bank reconciliation explained: what it is, why it matters, how often to do it, and the steps involved.
Published Thursday 28 August 2025
Table of Contents
Key Takeaways
- Reconcile your bank accounts weekly or monthly to catch errors early and prevent small discrepancies from becoming major problems that are harder to resolve.
- Use a dedicated business bank account to simplify the reconciliation process by keeping all transactions business-related and avoiding the complexity of mixed personal and business expenses.
- Implement automated reconciliation through accounting software with bank feeds to reduce reconciliation time from hours to minutes while improving accuracy through smart transaction matching.
- Record bank fees and timing differences between your accounting records and bank statements as legitimate adjustments to maintain accurate financial records and balanced accounts.
What is bank reconciliation?
Bank reconciliation is the process of matching your business accounting records with your bank statements to ensure accuracy. You compare transactions, balances, and timing differences between both records. When discrepancies appear, you investigate and correct them to maintain accurate financial records.
- spot and correct bookkeeping mistakes before they compound
- identify unauthorised transactions or suspicious activity early
- get reliable financial data instead of estimates or guesswork
- classify deductible expenses and prepare complete records for filing, which under New Zealand’s Tax Administration Act must generally be retained for seven years
- assign costs to specific jobs to measure true profit margins
How often should you reconcile your bank account?
You need to reconcile your accounts before filing tax, which might be monthly or annually depending on your situation. But it's a good habit to get into more often.
Reconciling daily or weekly keeps your financial records up to date. It also makes the task smaller and easier to manage. If you wait longer, transactions pile up and the job becomes harder. Using accounting software can make this a quick daily task and help you stay on top of your finances with less stress.
Our number one bank reconciliation tip
Use a dedicated business bank account to simplify reconciliation. When all transactions are business-related, matching records becomes straightforward.
Common reconciliation issues:
- mistype amounts or account codes, or fail to use specific English phrases on documents like tax invoices, as required by the Goods and Services Tax Act (GSTA)
- record transactions on different dates
- forget or overlook entries
Mixing personal and business transactions in one account makes reconciliation significantly more complex and time-consuming.
The bank reconciliation process
Bank reconciliation requires two sets of records from the same period: your accounting records and your bank statements. The process involves matching transactions between both records.
Manual reconciliation can take a lot of time if you use paper statements.
Automated reconciliation streamlines the process:
- Bank feeds: Transaction data flows directly into accounting software
- Side-by-side comparison: View both records on one screen
- Smart matching: Software like Xero suggests transaction matches automatically
- One-click approval: Confirm matches with minimal manual input
This can reduce your reconciliation time from hours to minutes.
Whether you do it automatically or manually, you can learn more in the bank reconciliation guide.
Common bank reconciliation questions
No, not every transaction has to match perfectly. Some transactions bypass your bank account, which is fine if you document them properly.
Q: Why do transactions go missing?
Timing delays between recording and clearing cause temporary mismatches. This is normal for cheques and electronic transfers.
Q: Why am I always a few dollars off?
Bank fees reduce your balance each month. Record these as business expenses to balance your accounts.
Q: How often should I reconcile?
Weekly or monthly works best. More frequent reconciliation prevents small errors from becoming big problems.
Q: How do I actually do it?
Compare your accounting records with your bank statement line by line, matching transactions and investigating differences.
Getting started with bank reconciliation
Bank reconciliation is more than just a bookkeeping chore – it’s your way of keeping a finger on the pulse of your business. It helps you spot issues early, understand your cash flow, and make confident decisions.
While it might sound complex, it doesn't have to be. With the right tools, you can make it a simple, fast, and even satisfying part of your routine. Ready to see how easy it can be? Try Xero accounting software for free and take control of your finances.
FAQs about bank reconciliation
What are the main steps in bank reconciliation?
The process involves a few key steps. First, gather your records – your bank statements and your business's cash book for the same period. Next, compare the deposits and withdrawals on both sets of records, ticking off matching items. Then, identify any differences, such as outstanding cheques or bank fees. Finally, adjust your cash book for any legitimate items found on the bank statement that you missed, and prepare a statement that explains any remaining differences.
How do you prepare a bank reconciliation statement?
To prepare the statement, start with the balance from your bank statement. Add any deposits that are in your books but not yet on the statement (deposits in transit). Subtract any outstanding cheques – those you've written but haven't cleared the bank yet. The final figure should match the adjusted balance in your business's cash book.
What should I do if my bank statement doesn't match my records?
Discrepancies are common. Start by double-checking your work for simple data entry errors. Often, the difference is due to timing – cheques that haven't cleared or deposits that haven't processed. It could also be bank fees or interest you forgot to record. Systematically go through each transaction to find the source of the difference.
Can I do bank reconciliation without accounting software?
Yes, you can do bank reconciliation manually using a spreadsheet and your paper or PDF bank statements. However, it takes more time and is more prone to errors. Accounting software automates much of the process by pulling in your bank transactions and suggesting matches, which saves you time and improves accuracy.
Disclaimer
Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the content provided.
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