Bank Reconciliation 101: Why Your Bank Balance Isn't Your Profit
· RKube Services
Your bank balance and your books rarely match on any given day. Here's what a bank reconciliation is, how to do one, and why it's worth doing every month.
"I have $42,000 in the bank, so I must have made $42,000, right?" We hear some version of this often, usually from a business owner who's just seen a tax projection that doesn't match what they think they earned.
Your bank balance tells you how much cash you have right now. It doesn't tell you what you earned, what you owe, or whether that cash is already spoken for. A bank reconciliation is the monthly check that connects the bank's number to your books, and it's the foundation for every other number you rely on.
Why Bank Balance and Profit Are Different
A few everyday reasons:
- Loan principal payments reduce cash but aren't an expense
- Owner draws or distributions reduce cash but aren't an expense
- Equipment purchases reduce cash, but the tax deduction follows depreciation rules, not the day you paid
- Sales tax you collected sits in your account but belongs to the state
- Customers who owe you and bills you haven't paid don't show up in the bank at all
So even perfectly kept books won't make your bank balance equal your profit. What they should do is make your bank balance agree with the cash account in your books, after timing differences. That's what reconciliation confirms.
What a Bank Reconciliation Is
It's a comparison between your bank statement and the cash account in your accounting system for the same period. You explain every difference until the two agree. If they can't be made to agree, something is missing, duplicated, or wrong in your books.
Step by Step
- Get the statement. Pull the bank statement for the month and note the ending balance.
- Match transactions. Tick off every deposit and withdrawal that appears in both the statement and your books.
- List outstanding items. Checks you wrote that haven't cleared, and deposits you recorded that the bank hasn't posted yet.
- Record bank-only items. Bank fees, interest, and automatic payments that are on the statement but not yet in your books.
- Compare adjusted balances. Statement balance adjusted for outstanding items should equal your book balance adjusted for bank-only items.
- Investigate leftovers. Any remaining difference needs to be found, not plugged.
Common Discrepancies
Most differences fall into a handful of buckets. Timing is the most common and least worrying: a check mailed on the 29th that clears on the 3rd. Then there are missing entries, like a monthly software charge nobody set up in the books, or a payment-processor fee netted out of deposits. Duplicates happen when a bank feed imports a transaction that someone also entered by hand. And sometimes it's a simple typo, like $1,250 entered as $1,520. If your difference divides evenly by 9, a transposed number is a good first guess.
A Worked Example
Here's a small retailer's May reconciliation:
- Bank statement ending balance: $24,850
- Books cash balance: $22,995
Adjusting the bank side:
- Add deposit in transit (May 31 sales deposited June 1): +$1,400
- Subtract outstanding check #1087 to a supplier: −$3,200
- Adjusted bank balance: $23,050
Adjusting the book side:
- Subtract bank service fee not yet recorded: −$35
- Subtract card processor fees netted from deposits: −$210
- Add interest earned: +$300
- Adjusted book balance: $23,050
Both sides agree at $23,050. Notice the books needed three corrections, and together they changed profit by $55. Small, but multiply that by twelve months and a few more accounts and it adds up. The other thing to notice: this retailer has $24,850 in the bank, but $3,200 of it is already committed to a supplier.
Make It a Monthly Habit
Reconciling once a year, at tax time, is where most bookkeeping trouble starts. Errors pile up, older statements get harder to pull, and nobody remembers what a $600 transfer in March was for. Monthly reconciliation takes far less time per month and catches fraud, double charges, and missed deposits while they're still easy to fix.
Mid-June is a good time to get current. The first half of the year closes on June 30, and you want your January through June numbers reconciled before you use them for a Q3 estimated payment, a loan review, or a mid-year tax projection. The IRS also expects your books to be supported by records like bank statements, so reconciled accounts make your return easier to support if questions ever come up.
Source: IRS: Recordkeeping for Small Businesses
How RKube Helps
- Reconcile every bank, credit card, and loan account monthly
- Catch up and reconcile past months if you've fallen behind
- Flag unusual or duplicate transactions for your review
- Send a clean monthly P&L and balance sheet you can actually use
If your accounts haven't been reconciled in a while, our free 30-day bookkeeping trial is an easy way to get current, or call us at (984) 234-7030: https://rkubeservices.com/campaign
Final Thoughts
Your bank balance is a fact. Your profit is a calculation, and it's only as good as the transactions behind it. Reconciling every month is the unglamorous habit that makes every other financial decision more reliable.
RKube Services
Bookkeeping, tax preparation, payroll, and proactive tax planning.