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A missing bank charge needs adding to your books; a payment already recorded but waiting to clear belongs on the outstanding-items list. Bank reconciliation compares your statement with your account records to distinguish errors from timing differences and explain the balance at a chosen date.
Start With One Account And a Clear Cut-off
Choose one bank account and a defined period, such as a calendar month. Gather its statement, the corresponding cashbook or bank-account ledger, and the previous reconciliation. Keep invoices, receipts and payment confirmations handy for investigating individual entries.
Use the statement’s closing date for both sets of records, rather than comparing a month-end figure with today’s live balance.
Imported bank transactions can populate digital records for Making Tax Digital (MTD). Even with the best MTD software, reconciliation involves checking those entries against the statement and investigating any unexplained difference.
Check that each opening balance follows from its preceding closing balance. Where the bank and book opening figures differ, review outstanding items from the previous reconciliation first. A valid timing difference can explain the gap without either balance being wrong.
Check Transactions in Both Directions
Work through the statement line by line, matching each receipt and payment to its bookkeeping entry. Compare the amount, reference and date. A transaction might have been recorded before it appeared on the statement, so assess date differences alongside the other evidence.
Where several receipts have the same value, use customer references or payment confirmations to distinguish them.
Mark confirmed matches, then reverse the process: examine bookkeeping entries with no corresponding statement transaction. This second pass helps identify duplicates and entries assigned to the wrong account, as well as genuine outstanding payments or receipts.
Keep unpaid customer invoices separate from this check. They belong in your invoice records; enter the bank receipt when payment arrives, rather than when you expect it.
Decide What Each Difference Needs
Sort unmatched items according to the action required:
- Correct the books: add a missing charge or interest receipt supported by the statement, correct a wrongly entered amount, or resolve a confirmed duplicate.
- Document a timing difference: list valid receipts or payments already recorded but awaiting clearance, with their dates, amounts and references.
- Investigate further: check unfamiliar payments, incomplete references and unexplained amounts. Contact the bank about suspected bank errors or unauthorised transactions.
Some matches need additional records. A payment processor’s settlement, for example, may combine several customer payments and deduct fees. Its settlement report should explain how the individual payments and charges produce the amount received.
Categorisation is a separate check. Record transfers between your accounts as transfers and identify personal withdrawals separately from business expenses. Matching a transaction to the statement establishes the money movement; its accounting category and tax deductibility still need assessing.
Work Through a Simple Reconciliation Example
Suppose a sole trader’s month-end statement shows £3,000, while the cashbook shows £2,880. Checking the transactions reveals two differences: a £20 bank charge missing from the cashbook, and a £140 supplier cheque already recorded there but not yet cleared.
First, record the missing charge. The corrected cashbook balance becomes:
£2,880 − £20 = £2,860
Then account for the outstanding cheque in the reconciliation calculation:
£3,000 − £140 = £2,860
The adjusted figures agree. The cheque explains why the statement still shows more money than the corrected books.
The £140 subtraction belongs on the reconciliation record, leaving the bank statement unchanged. Keep the cheque on the outstanding-items list until it clears, then match it to the existing bookkeeping entry rather than record a second payment.
Finish with Explained Balances, Not Forced Totals
If a difference remains, revisit the account and dates, review prior outstanding items and recalculate spreadsheet totals. Look for omitted rows, duplicate imports or an incorrectly entered amount. A difference equal to a known transaction offers a useful lead: check the evidence before deciding it explains the problem.
Before calling the reconciliation complete, confirm that statement entries are accounted for, corrections have supporting evidence, outstanding items are itemised and the adjusted balances agree. Keep a dated reconciliation record so the next check starts with known balances and outstanding items.
Never create an unexplained balancing entry just to make the totals agree. Record the unresolved item and your next investigation step, seeking help from the bank or your accountant where needed.
Monthly reconciliation is a practical starting point. Check more often if transactions are frequent, and follow up older outstanding items instead of carrying them forward indefinitely.
The post How to Do Bank Reconciliation as a Sole Trader appeared first on Home Business Magazine.
Original source: https://homebusinessmag.com/money/accounting-and-bookkeeping/bank-reconciliation-sole-trader/