They should be done at least every quarter, but here at Loving Ledgers, we like to do these monthly.
A bank reconciliation is a comparison between your bank account balance in Xero, and your bank statement balance.
Running a Reconciliation Report will help detect any missing or duplicate bank transactions in Xero.
Jack runs a digital marketing agency and uses Xero to keep track of his accounts. The bank feed didn’t import transactions between 3-10 November correctly, and there are 30 missing bank statement lines.
Jack runs a profit and loss report for November which shows a profit of $25,000 for the month, which is much higher than his usual profit of $15,000. He thinks business is picking up and decides to spend an extra $5,000 on marketing.
The 30 missing bank statement lines included $7,000 of missing expenses, so Jack has made a decision based on incorrect data. A business owner would usually have a feel for what their profit should be, so we’d hope that Jack would first notice that the profit in November looks high and investigate before deciding to spend more money on advertising.
If Jack’s bookkeeper had compared the bank balance in Xero to the bank statement balance they would have identified there were transactions missing in Xero.
Example 1: Xero’s Reconciliation Report
Above is an example of the Reconciliation Report in Xero. It is a comparison between the bank balance in Xero and the imported Bank Statement Balance (according to the bank). In this example, the two figures are both the same which is what we want!
It is also a good idea to check that the Statement Balance line in Xero agrees to your bank statement (or online banking balance).
Example 2: Xero’s Reconciliation Report (with un-reconciled lines)
In this example, there are some un-reconciled lines which explains why there is a difference between the Balance in the Xero figure of ($951.58) and the Statement Balance of $1,743.42.
The ‘Un-reconciled Bank Statement Lines’ are transactions that haven’t yet been reconciled on the reconcile screen.
If we add the $2,695 of reconciled statement lines to the balance in Xero of ($951.59), we get a balance of $1,743.42 which matches the bank statement balance. Again we are happy!
Example 3: Xero’s Reconciliation Report (Balance out)
Here there is a ‘Balance out by $5,721.50’ line which means the bank account in Xero doesn’t reconcile to the Statement Balance.
We don’t like it when the balance is out.
The most common reason that a Reconciliation Report doesn’t balance is that the bank feed has missed or duplicated some transactions.
What to do when the reports says ‘Balance is out’
If the balance is out then first we need to identify the error and then correct this in Xero. The balance is usually out for one of the following reasons:
- Missing statement line(s)
- Duplicate statement line(s)
- Deleted statement line(s)
- Manual statement line(s)
It can also be due to the opening (conversion) bank balance being incorrect. The Xero help centre has some great tips on correcting conversion balances. Here are some more tips on how to work through a Reconciliation Report where the balance is out.
The team at Loving Ledgers can also help to get your Bank Reconciliation to balance. Just get in touch with the details and we’ll be happy to sort it out.
Where to from here
- Balance the Reconciliation Report to your bank statement each month. Make sure you add this step to your end of month checklist.
- Also, create a recurring task in your calendar to ensure this important process is completed every month.