Reconciliation is the most vital process for ensuring the integrity of your financial data. After setting up your company file, connecting your accounts, and categorizing your initial transactions, you are now ready to perform your first reconciliation.
This process confirms that the transactions recorded in QuickBooks match your official bank and credit card statements, providing an essential layer of verification for your financial reports.
The bottom line is that when the bank and credit card transactions in QuickBooks reconcile with the bank, that means your financial statements are accurate and can be reliable to make fact based, business decisions.
The Purpose of Reconciliation
At its core, reconciliation is the act of matching the financial activity in QuickBooks to the records provided by your financial institutions. The primary goal is to ensure both you know and the bank each know about every transaction that occurs in the account. This confirms that the data flowing into your financial reports is accurate and reliable.
Consistent monthly reconciliation provides three strategic advantages:
Immediate Error Detection: Financial institutions can make errors, such as duplicate charges or incorrect transaction amounts. The reconciliation process forces a detailed review of every transaction, allowing you to identify and address these discrepancies before they compound.
Data Integrity: Your financial reports are only as trustworthy as the data they are built on. Reconciliation validates this data, ensuring that your strategic decisions are based on an accurate view of your company’s financial position.
Streamlined Tax Preparation: A business with twelve consecutive months of reconciled accounts is positioned for a seamless tax season. It minimizes the need for last-minute forensic accounting and provides your tax professional with clean, verifiable records.
A 4-Step Process for Reconciliation in QuickBooks
To begin, have your official bank or credit card statement for the month on hand.
Step 1: Prepare Your Transactions
Before you start the reconciliation, ensure that all transactions are matched and categorized. Doing this first will help prevent errors and discrepancies during the process, making it much easier to achieve a zero difference.
Step 2: Initiate the Reconciliation
Select the account you wish to reconcile and enter the ending date and ending balance exactly as they appear on your statement. This initial step is critical for a successful reconciliation.
Step 3:Clear Transactions
With your bank accounts connected and all transactions matched and categorized, the reconciliation process is largely automated. Most transactions will be automatically marked as cleared, so you won't need to check them off one by one.
However, in rare cases, you may have to manually clear a transaction. For example, if you voided a check, it may be recorded in QuickBooks but never appear on your bank statement. In this situation, you would clear the associated transactions since the bank will never know about it.
A Note on Reconciling Items: Some transactions may appear in your QuickBooks records but not on your bank statement. These are typically outstanding checks (checks you've written but the recipient hasn't cashed yet) and deposits in transit (deposits you've made that haven't yet been processed by the bank). These items are called reconciling items and will be accounted for in the next reconciliation period.
If other transactions remain uncleared after reviewing your bank statement, the cause is typically a missed transaction, a duplicate entry, or an error in the entered statement ending balance. A careful review will almost always uncover the discrepancy.
A best practice is to periodically review the bank and credit card account registers in QuickBooks and filter on transactions with No Status. A no status transaction was not included in the feed from the bank and could be a miscoded or erroneous transaction which should be either offset by a clean up transaction entry or deleted from the account register.
As you fix discrepancies or clear items, the difference tracker at the top of the screen will update. Continue this process until the difference is $0.00.
Step 4: Finalize the Reconciliation
Once the difference is reduced to zero, click "Finish now" to complete the process. QuickBooks will save a formal record of the reconciliation and lock the cleared transactions to prevent accidental edits, securing the integrity of your historical data.
This video walks you through the process of reconciling in QuickBooks: How to reconcile your accounts in QuickBooks Online
A watch out is that if any transaction that is reconciled is subsequently changed and it’s status goes to not reconciled, you will not be able to start your next bank reconciliation. To help with resolution in this situation, once you complete the reconciliation process in QuickBooks, it can be helpful to save a PDF copy of the reconciliation report for future reference. This would come in handy to help identify any previously reconciled transactions that have changed from reconciled to not reconciled.
Completing this reconciliation process marks a significant milestone in establishing a professional-grade bookkeeping system.