How account reconciliation keeps your business on track

November 23, 2020
5 minutes read

Account reconciliation. There’s a good chance you’ve heard of it, but what does it actually mean?

Also known as “bank reconciliation”, account reconciliation is an important part of every business. This guide details how to tackle it in Wave, so you’re always on top of your record keeping.

What is account reconciliation?

Account reconciliation is when you compare your accounting records to the bank-provided financial statements. Essentially, you’re looking to make sure the information, transactions, and dollar amounts match. It’s one of the easiest ways to identify errors or detect fraud.

“Often, there are transactions in your accounting records that haven't yet been recorded by the bank,” explains Rob Stephens, founder of CFO Perspective. “These differences are called reconciling items. The most common reconciling items are checks that you wrote that haven’t yet been deposited by the person or company you gave them to.”

Why you need account reconciliation

Cash flow is a constant challenge for small businesses. Three-quarters of entrepreneurs feel they need more cash, and the second-biggest reason they fail is because they run out of it; 20% of small businesses inevitably fold in their first year.

Detect errors and be ready for tax season

No matter how hard you try or how much experience you have, avoiding errors entirely will always be a challenge. They can happen both on your end and with the bank, so it’s important to notice discrepancies and find out which entry is accurate, and which needs to be addressed.

Error-free records are critical when it comes to preparing for tax season. If your records are inaccurate, you could end up under or over reporting your earnings and opening the door to fees, penalties, and all sorts of extra hassles.

Performing account reconciliations throughout the year allows you to avoid adding hours of extra work at tax time. So instead of manually going through months-old records, you can focus on other elements of your business and enjoy peace of mind knowing you’re tax-ready and prepared to be profitable.

Run your business more effectively

If you notice errors regularly, it’s likely there’s opportunity to improve your business operations. By avoiding making these errors, you can run processes more smoothly and be confident in your records.

“It can also help point out if you need to change how cash flow or record keeping are handled, especially if you are experiencing issues with bounced checks or using lines of credit when you don't actually need to,” says Chane Steiner, CEO of Crediful. “You’ll find discrepancies before anything gets out of hand.”

Identify fraud

Fraud is the top payment-related challenge businesses face. Account reconciliations can help you identify fraud before it gets out of control, saving you money and avoiding further complications down the line.

“I’ve found fraudulent charges and caught them, which allowed me to alert my bank and shut down that account quickly, before too many fraudulent charges accrued,” says Darien Wilson, VP of Volare Systems, Inc. Her credit card number was stolen, and she noticed unauthorized transactions before it bled out her accounts.

Stephens has his own experience catching fraud thanks to account reconciliation. “One day, the wife of a small business owner I know asked why he was writing checks to an employee. She had seen the checks on the bank statement and thought it was odd,” he explains. “He wasn't writing these checks. The employee was committing fraud, and it was caught by reviewing the bank statement.”

If there are transactions that don’t look familiar to you, investigate. You never know what you’ll uncover.

Stay in control

Being on top of your financials gives you more control over them. “As an entrepreneur, reconciling my accounts is important because it helps me ensure that I have enough money in my accounts,” says Wilson.

She also credits bank reconciliation with avoiding unnecessary fees. “Very often, I find that there are unexpected charges on my accounts that I wouldn’t know about if I didn't reconcile,” she says. “For example, sometimes my bank charges a fee that I was not expecting.”

She also mentions that it helps her stay on top of auto-drafts and employee spend. “It's important for me to track those so I don't overdraw my account,” she says. “And because multiple people have cards on our bank and credit card accounts, it gives me a chance to keep an eye on the charges.”

How often should you do an account reconciliation?

Steiner recommends reconciling your accounts at least monthly.

Wilson does a full reconciliation monthly, but she also checks in on a daily basis. “Because I keep up with transactions online throughout the month, the monthly statement reconciliation doesn’t take long,” she says. “If I waited until the end of the month to reconcile, I might miss unexpected or fraudulent expenses and find my account overdrawn. This is why I reconcile with online downloads at least every few days, if not daily.”

Whatever your cadence, make it a regular business practice. This will help you maintain the cash flow you’ve worked so hard to build while ensuring you're still on pace to break-even and turn a profit.

How to do an account reconciliation

There are three easy-to-follow steps to performing an account reconciliation in Wave. You can follow them below, or check out our handy video guide.But first, make sure you have either a physical or digital copy of your bank statements handy.

1. Get started

  1. Navigate to Accounting > Reconciliation in the left-hand menu.
  2. Look for the account you’d like to reconcile. If you haven’t yet connected a bank account or uploaded a statement, you’ll need to get your transactions into Wave before you start.
  3. Click Get Started, and enter your bank balance for the final date of the period to be reconciled.
  4. If the bank balance and the Wave balance are the same, the account is reconciled. If the balances are not the same, Wave will load a page with the transactions in the period so you can review them.

2. Review your transactions

To ensure all the transactions in your account are accurately recorded, it’s important to check them against your bank statement.

  1. Select the check-mark to the right of a transaction to mark it as Matched. Marking a transaction as Matched means that you've matched it with the corresponding transaction on your bank statement.
  2. As you match transactions, you’ll see the progress bar at the top of the page move to indicate how many transactions in a period you’ve matched with a transaction on your bank statement, and how many are left to go. Your Wave balance is always the total of all transactions in the account, whether you’ve matched them or not.

3. Fix your transactions

When you review and match the transactions in Wave to those on your bank statement, it makes correcting errors simple. You can add and modify transactions right in the Reconciliation view, so it’s easy to manage duplicates, add missing transactions, and fix mistakes.

  1. If the most recent periods you've entered for an account are not reconciled, Wave will highlight the account and display it at the top of the list of accounts within a Financial Institution.
  2. If a period is unreconciled, you’ll see a red Needs Attention indicator on the timeline for that account. You can review all unreconciled periods within an account on the timeline to see where we’ve identified any issues.
  3. Click Fix to review transactions within the oldest unreconciled period. You can also click on the Needs Attention icon for a specific period to view only the transactions within that period.
  4. Review your transactions for accuracy by comparing the transactions in an unreconciled period to the transactions on your bank statement. If there are missing transactions, you can add them by clicking Add Transaction. If you find a transaction that needs to be modified, click on the transaction to Edit it. You can select the check boxes on the left-hand side of a transaction to Merge duplicates, or Delete inaccurate records.

If you had a period already reconciled, and then added a transaction to that already-reconciled period, the account will appear as 'Needs Attention', and you can click 'Fix' to re-reconcile the account.

Then, when you're in the period, you'll see that any transactions which weren't in the period when it was first reconciled will have a 'caution' symbol next to them so you can easily identify which transactions are new to the period.

All you have to do now is:

  • If the transaction is correct, change the Statement balance to match.
  • If the transaction is incorrect, edit or delete it as needed.

Moving forward with account reconciliation

Wave makes it easy to do a full account reconciliation, protecting your business and ensuring you get the money you worked so hard to earn. And if you want to make it even easier, Wave Money includes a free business bank account with built-in bookkeeping. With Money, your transactions sync with Wave Accounting, letting you take back your time to focus on other parts of your business.

By Alexandra Sheehan

The information and tips shared on this blog are meant to be used as learning and personal development tools as you launch, run and grow your business. While a good place to start, these articles should not take the place of personalized advice from professionals. As our lawyers would say: “All content on Wave’s blog is intended for informational purposes only. It should not be considered legal or financial advice.” Additionally, Wave is the legal copyright holder of all materials on the blog, and others cannot re-use or publish it without our written consent.

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