Bank reconciliation
What bank reconciliation is, why HMRC and lenders care about it, and a simple monthly process to keep it tight.
Articles
What is bank reconciliation?
Matching every transaction in your books against your bank statement until the two agree. Anything in the bank but not the books is unrecorded income or spending. Anything in the books but not the bank is an error, a duplicate, or a payment that has not cleared. A reconciled position means your accounts describe reality.
It is the single habit that separates reliable books from decorative ones.
Why HMRC and lenders care
In an enquiry, HMRC compares bank deposits against declared income. Unreconciled books cannot explain the differences, and unexplained deposits get treated as income. A reconciled ledger answers the question before it is asked.
Lenders read it the same way. Management figures backed by reconciled banks carry weight; figures that do not tie to the bank are just a spreadsheet.
A monthly process that takes an hour
Pick a fixed day each month. Pull the bank statement, match every line against the books, and investigate anything unmatched: categorise missed transactions, delete duplicates, and chase uncleared items older than a few weeks. Close the month only when the difference is zero.
Modern software with bank feeds does the matching for you and turns reconciliation into review. The feed suggests matches; your job is to confirm them and deal with the exceptions.
The problems that show up
The usual suspects: duplicated transactions from a double-imported feed, timing differences from payments that cross a month end, personal spending in the business account, and customer payments received against the wrong invoice. Each is small; unattended for a year, together they make year-end slow and expensive.
Portfolio Reporting Pack clients get this done for them — reconciled monthly numbers delivered by the 7th of each month, so the year-end holds no surprises.
Frequently asked questions
How often should I reconcile?
Monthly at minimum, and weekly for businesses with high transaction volume. The longer the gap, the harder each mismatch is to trace — a one-month-old query takes minutes, a ten-month-old one takes an afternoon.
What if the reconciliation doesn't balance?
Find the difference and work it down: check for duplicates first, then missing transactions, then timing differences around the period end. Never force a balance with a made-up adjustment — the difference is information about what is wrong.
Does software reconcile automatically?
Bank feeds automate the matching, not the judgement. Software suggests which bank lines match which entries; you confirm them and resolve the exceptions. That review step is the reconciliation.
Do I need a separate business bank account?
A limited company must keep company money separate — it is a distinct legal entity. A sole trader is not legally required to, but a mixed account means reconciling your groceries alongside your invoices, and it slows any HMRC check.