Chapter 7 — Cash, Bank Accounts, and Reconciliation

Cash, Bank Accounts, and Reconciliation

Your bank account is the financial record you can’t argue with: the bank knows exactly what came in and what went out. Reconciliation is the monthly ritual of proving your books agree with the bank — and finding out why when they don’t. It is the single most important control in small-business bookkeeping.

Reconciliation catches everything: a forgotten deposit, a check that cleared for a different amount than you wrote, an unentered bank fee, a duplicate entry, an unauthorized charge, even fraud. Monthly reconciliation finds problems while they’re small; yearly finds them when they’ve compounded into a crisis.

Reconciled books are trustworthy books: every financial statement, tax return, and loan application rests on cash being right. If your cash doesn’t reconcile, nothing downstream can be trusted.

How bank reconciliation works

Start with the bank’s ending balance.
Compare every transaction: match each deposit, check, transfer, and fee in your books to the bank statement, one by one. Most accounting software matches for you and flags the unmatched items.
Account for timing differences: outstanding checks (written but not yet cleared) and deposits in transit (recorded but not yet processed) — the bank doesn’t know about them yet, so they explain part of the difference.
Investigate everything else. After timing differences, any remaining gap is an error — yours or the bank’s. Common culprits: a transposed number ($54 recorded as $45), a missed bank fee, a deposit recorded twice.
Record the missing items: bank fees, interest earned, automatic payments you forgot to enter — the bank statement is the source of truth.
Confirm the adjusted balance matches: bank balance, plus deposits in transit, minus outstanding checks, equals your book balance. When it does, the account is reconciled — then lock the period.

Reconciling credit cards

Credit cards reconcile the same way, with one twist: the “balance” you’re matching is what you owe. Each month, match every charge and payment on the card statement to your books. Unmatched charges are unrecorded expenses (record them now — with receipts) or charges that aren’t yours (dispute them immediately).

One card for business, one for personal — never mixed. A mixed card makes reconciliation an excavation.
Record charges when they happen, not when the statement arrives. Enter or sync charges weekly — waiting means a month of blind spending.

Finding and fixing discrepancies

When the numbers don’t match, work systematically:

Check the obvious first: Is the difference exactly double an entry? (Something recorded twice.) Is it divisible by 9? (A transposed number — $81 vs. $18 differ by 63, which is 9 × 7.)
Look at the beginning balance. If last month reconciled and this month doesn’t, the error is in this month’s activity — or last month’s ending balance was changed after the fact, which is why you lock reconciled periods.
Scan for missing bank-originated items: fees, interest, automatic debits, and merchant processing batches.
Never “plug” the difference. A fake adjustment turns small errors into permanent lies. If a small difference survives a thorough search, record it to a clearly labeled account (like “Reconciliation Discrepancies”) — but treat any recurring plug as a red flag.

The discipline of the monthly close

Reconcile all bank accounts and credit cards.
Review accounts receivable — who’s late, and accounts payable — what’s due.
Record recurring entries (depreciation, loan interest, accruals).
Glance at the profit & loss — does anything look wrong or surprising?
Lock the month.

Do it within the first week or two after month-end, every month, without exception. Businesses that do know where they stand; the rest are guessing.

When reconciliation finds something ugly

Most discrepancies are innocent — a missed fee, a transposed number — but reconciliation is also your fraud detector:

An unauthorized charge: dispute it with the bank immediately, change any compromised credentials, and review the last few months for similar charges. Report fast — card networks limit your liability if you report promptly, and business debit accounts have narrower windows than consumer ones.
A duplicate vendor payment — the same invoice paid twice, once by check and once by transfer. Call the vendor promptly; most will credit your account or refund. Record the expected refund as a receivable so it doesn’t vanish.
A missing deposit: the books say a customer paid, but the money never arrived. Was the check actually deposited? Did a transfer fail? Trace it the same day — money trails go cold fast.
Signs of internal misuse: round-number payments to unfamiliar vendors, receipts that don’t quite make sense. Restrict access, preserve records, and consult your CPA or an attorney before confronting anyone. Rare — but “rare” is exactly why the monthly reconciliation matters.

The principle behind all four: reconciliation isn’t just arithmetic — it’s oversight.

Reconciling the in-between accounts

The in-between accounts from earlier chapters should regularly hit zero — or explain themselves:

Undeposited Funds should clear to zero after each deposit run. A lingering balance means recorded receipts never deposited — investigate anything older than a few days.
Processor clearing accounts (Stripe, Square, PayPal) should zero out as batches settle. A growing balance means fees aren’t being split out or batches aren’t being recorded — both distort your income.
Payroll liabilities should match what you owe per your deposit schedule. A growing balance is the reddest of red flags — withholdings aren’t being deposited.

After the bank accounts reconcile, glance at every clearing and liability account: “does this balance make sense?” Ten seconds most months.

Key takeaways

Reconcile every bank account and credit card every month — it’s the most important control in your books.
Match each transaction, explain timing differences (outstanding checks, deposits in transit), and investigate the rest.
Record bank-originated items (fees, interest, auto-payments) that you missed during the month.
Never plug a difference with a fake entry; find the real cause.
Keep business and personal cards separate; record charges weekly, not at statement time.
Build reconciliation into a monthly close routine and lock each reconciled period.