Definition

Bank reconciliation is the process of matching your books to your bank statement so both sides agree. Every deposit and withdrawal at the bank should appear in your accounting records (ultimately as journal entries in the general ledger), and every book entry that moved cash should trace to the bank. When they do not match, you find errors, missing transactions, duplicates, timing differences, or fraud before they distort your P&L or tax return.

Reconciliation is not the same as importing transactions from Plaid or CSV. Importing feeds the bank side; reconciliation proves your ledger is complete and accurate for a specific account and period.

Why It Matters

Unreconciled books produce wrong cash balances, misleading profit, and surprise problems at year-end. Contractors juggle multiple accounts (operating, payroll, credit cards, owner draws), job deposits, retainage releases, and subcontractor checks — small mismatches compound fast.

Monthly reconciliation is the minimum discipline serious businesses keep. Bonding companies, lenders, and CPAs assume reconciled cash accounts. Without it, you cannot trust job costing tied to bank-paid expenses or know whether you actually have cash to make payroll.

Field Example

Books show checking at $42,500. The bank statement ending balance is $41,800. After investigation:

Item	Amount	Side
Check #1042 to lumber yard — written, not cleared	−$500	Outstanding check
Bank service fee — on statement, not in books	−$200	Missing book entry

Adjust books: record $200 bank fee (expense + credit cash). Adjusted book balance: $42,500 − $200 = $42,300.

Adjust bank side: $41,800 + $500 outstanding check timing → once check clears, both sides align. Until then, reconciled adjusted balances match at $42,300 (book) vs bank $41,800 + $500 outstanding = $42,300.

Calculation / Formula (if applicable)

Adjusted book balance = Book balance ± reconciling items (missing entries, errors)

Adjusted bank balance = Statement balance − outstanding checks + deposits in transit

Reconciliation complete when: Adjusted book balance = Adjusted bank balance

Golden rule: Reconciliation validates the cash account in your GL, not just a transaction list.

Common Misconceptions

“My bank feed syncs — I’m reconciled.”
No. Sync imports activity. Reconciliation matches that activity to your ledger and explains every difference.

“Reconciliation is only for accountants.”
Owners and bookkeepers do it monthly. Waiting for tax season means months of drift.

“If the balance is close enough, it’s fine.”
A recurring $50–$300 gap is often a mis-coded card payment, duplicate import, or uncategorized transfer — all of which corrupt job costs and 1099 totals.

“Cash basis means I don’t need to reconcile.”
Cash basis affects when you recognize income and expenses in reports. You still must prove cash in the bank matches your records.

“Credit cards don’t need reconciliation.”
They do — against the card liability balance, not just the payment from checking.

Monthly Steps (Contractors)

Pick the account and statement ending date (e.g. operating checking, May 31).
Confirm opening balance matches last month’s reconciled closing balance.
Mark cleared items — every bank line item should match a book entry (or be explained).
List outstanding checks — written before period end, not yet on the statement.
List deposits in transit — recorded in books, not yet on the statement (rare with modern banking).
Enter missing items — bank fees, interest, automatic loan debits, card payments you forgot.
Investigate duplicates — common with CSV re-imports and Plaid reconnects.
Document and close — save reconciliation report; adjusted balance becomes next month’s opening.

Frequency: Monthly for operating and payroll accounts; weekly during heavy job cash flow or when fraud risk is higher.

Outstanding Items Explained

Outstanding checks — You recorded the payment; the payee has not deposited yet. Normal for vendor and sub checks.
Deposits in transit — You recorded a deposit; the bank has not posted it (often overnight).
Unrecorded bank items — Only on the statement (fees, interest, chargebacks). Must become journal entries.
Book errors — Wrong amount, wrong account, expense coded to wrong job.
Transfers — Money moved between your accounts; both sides must appear or the books look like money vanished.

When Balances Won’t Match

Symptom	Likely cause
Off by exact duplicate amount	Same transaction imported twice
Off by round number monthly	Bank fee or subscription not booked
Slowly growing gap	Unrecorded card charges or owner draws
Large one-time gap	Wrong check amount, mis-keyed deposit, fraud
Job costs wrong but bank “looks fine”	Expenses categorized but transfer not paired

Fix the source journal entries, not just the running balance display.