What is bank reconciliation?
Definition of bank reconciliation
Bank reconciliation is the process of checking to make sure that the balance on your bank statement matches the bank balance in your accounts.
When the two figures match, you have reconciled your bank account. If the two figures don't match, your bank account is unreconciled.
If you find that your bank account is unreconciled, check to make sure that you've included all your bank transactions in your accounts. Here are some common things to watch out for:
- Transfers between two bank accounts
- Bank interest received
- Bank charges paid
- Typos - for example a £1,000 transaction accidentally entered as £100
Tip from Emily: if the difference between the two balances is divisible by 9, that means you've got two numbers the wrong way round in a transaction. For example, if you've entered a transaction as £420 instead of £240, the difference will be £180 - which is £20 x 9!
Banking in FreeAgent
You can use FreeAgent's "explain" functionality to reconcile your bank transactions to your accounts. FreeAgent will even use transactions that you have reconciled in the past to automatically match them in the future, saving you even more time. Find out more about FreeAgent's banking features.
Frequently Asked Questions
Why is it important to reconcile my bank accounts?
A reconciled bank account is a sign of healthy, up-to-date accounts. A business that knows exactly where their money is going will be able to regularly check their cash flow, profitability, tax position, and can fundamentally make better business decisions.
A reconciled bank account is also very important to HMRC. If your bank accounts are unreconciled, a visiting HMRC inspector might think you're concealing income and try to charge you more tax!
If you don't keep your bank account reconciled, your accountant will have to do it for you. You could end up paying more money for them to do it, but even worse, you won't know how your business is doing until the accountant has reconciled the accounts, which could be months later. That makes it much harder to make well-informed decisions about the future of your business.
Bank reconciliation with accounting software
By enabling bank feeds, or regularly uploading bank transactions, FreeAgent's accounting software will match the amount in your bank account – so you don't need to do a traditional bank reconciliation.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.