How to Do a Bank Reconciliation (And Why the CRA Cares)

A contractor came to us last spring with two numbers that would not agree. His accounting software said he had $41,000 in the bank. The bank said $28,000. He had been running the business off the software figure for four months, and he had just signed a lease on a second truck.

Nothing dishonest had happened. Three cheques he had written in November had never been cashed, a supplier had taken two payments for one invoice, and the software had been quietly duplicating a recurring transfer since the spring. Every one of those was findable in about an hour. Nobody had looked, because nobody had reconciled.

We spent years in the CRA’s audit division, and the single fastest way to tell how a file was going to go was to ask whether the bank accounts were reconciled. Not whether the books looked tidy. Whether they tied to the statements. Here is how to do that properly, and what an auditor is actually testing when they ask.

The short answer

A bank reconciliation is a comparison of what your books say happened to your money against what the bank says happened, for one account, over one closed period. You match every transaction on both sides, list the ones that appear on only one side, and explain each of them. When the explained differences account for the entire gap between the two closing balances, the account is reconciled.

It is not a formality and it is not bookkeeping housekeeping. It is the only routine control most small businesses have that proves the numbers in their financial statements correspond to real money.

Why the CRA cares, and it is not the reason most owners assume

Owners tend to think reconciling matters because the CRA wants tidy books. That is not it. The CRA’s requirement is about the trail.

The CRA states that electronic records must show an audit trail from supporting documents, whether paper or electronic, to the summarized financial accounts, and it sets that out on its page covering the review of business systems and audit trails. An audit trail is defined there as the information needed to recreate the sequence of events behind a transaction.

Read that as an auditor reads it. The summarized financial account is the number on your income statement. The supporting document is the invoice or the receipt. The bank reconciliation is the bridge between them, and without it the trail has a hole in the middle that no amount of filed receipts will close.

The CRA is also specific that bank records are records. Its list of what counts includes bank deposit slips, bank statements and cancelled cheques alongside ledgers, journals and sales invoices, and it appears on the CRA page explaining what records are and who has to keep them. Its guidance for business records says plainly to keep your duplicate deposit slips, bank statements and cancelled cheques.

There is a warning on that same CRA page that is worth quoting for what it implies. If auditors cannot determine your income because your records are incomplete, they will use other methods to establish your income and your GST/HST net tax. Those other methods are the indirect verification techniques, and they start from your deposits. An unreconciled bank account is an invitation to have your revenue estimated from the outside rather than accepted from your books. We wrote about how files get selected in the first place in our guide to what actually triggers a CRA audit.

What you need in front of you before you start

Reconciling with the wrong inputs wastes an afternoon. Gather four things.

The bank statement for one closed period. A real statement, not a screen of recent transactions. The statement carries an opening balance, a closing balance and a date range that will not shift under you while you work. Downloaded activity for the last thirty days will shift, and you will never close.

Your books for the same account and the same dates. Whatever you use, from accounting software to a spreadsheet, you need the ledger for that one bank account only.

Last period’s completed reconciliation. This is the one people skip. Your opening balance has to be the closing balance that was proven last time. If you cannot produce last period’s reconciliation, you are not reconciling, you are guessing, and any error older than this month is already baked into your opening number.

The source documents for anything you already know is unusual. The supplier who bills irregularly, the customer who pays in odd amounts, the month you switched payment processors.

How to do a bank reconciliation, step by step

Step 1: Freeze the period and agree the opening balance

Pick one closed month. Confirm that the opening balance in your books equals the opening balance on the statement. If those two do not agree, stop. The problem is in a period you already closed, and working forward from a wrong opening balance produces a reconciliation that looks finished and proves nothing.

Step 2: Tick the deposits

Work down the deposits on the statement and find each one in your books. Match on amount and date together, never on amount alone. Two customers paying $1,450 in the same week is common, and matching the wrong one will hide itself for months.

Mark three categories as you go. Deposits that appear on both sides are matched and finished. Deposits on the statement with nothing in the books are unrecorded income until proven otherwise, and they are the first thing an auditor looks for. Deposits in the books with nothing on the statement are either timing or fiction.

Step 3: Tick the withdrawals

Same process on the payment side. Cheques, card payments, preauthorized debits, transfers and fees. The fees are the ones businesses miss most, because nobody enters a $4.50 service charge by hand and most bank feeds import it with a description that means nothing.

Step 4: List what is left, on both sides

Everything unticked goes on a list with a date, an amount and a category. There are only five categories and we work through them in the next section. If something does not fit one of the five, it is an error and it needs a source document.

Step 5: Prove the arithmetic

Start with the statement closing balance. Subtract the payments that have left your books but not yet the bank. Add the deposits that are in your books but not yet at the bank. The result must equal the closing balance in your books after you have recorded the items the bank knew about and you did not, such as fees and interest.

When those two numbers agree to the cent, the account is reconciled. Not close. To the cent. A residual difference of $12 is not a rounding issue, it is one real transaction you have not found, and it will grow.

Step 6: Post the adjustments

Anything the bank recorded that your books did not, such as service charges, interest, returned payments and processor fees, now gets entered properly and coded to a real account. Do not sweep these into a catch all. The bank fees line on a set of books tells you what your payment processing actually costs, which most owners have never measured.

Step 7: Lock it and keep it

Mark the period reconciled in your software, save the statement, and save the reconciliation report itself. That report is the working paper. It is the thing that lets somebody, including a CRA officer three years from now, follow your closing balance back to a bank statement without asking you a single question.

The five differences you will find, and what each one means

Outstanding payments. You wrote the cheque or sent the payment, the recipient has not cashed or it has not cleared. Legitimate, and it should disappear next period. A cheque that is still outstanding after six months is not a timing difference any more, it is a stale item that needs a decision.

Deposits in transit. Money you received and recorded near the period end that lands at the bank after the cut off. Legitimate, and it should clear in days. A deposit in transit that never arrives is either a recording error or money that was never actually received.

Bank originated items you did not record. Service charges, interest earned, returned payment fees, currency conversion, processor deductions. Not errors on the bank’s part, just facts you did not know until the statement arrived. These get posted.

Your errors. Transposed figures, wrong dates, a payment entered twice, a deposit coded to the wrong account, a transfer recorded as income. This category is where the real money hides. In the contractor’s file we opened with, the duplicated recurring transfer had been running for eleven months.

The bank’s errors. Rare, but they happen, and they are the only category you cannot fix yourself. Document it and call the bank. Do not force the reconciliation to balance by writing off a bank error into an expense account, because you have then hidden a claim you are entitled to make.

What to do when it will not balance

Everyone hits this. There is an order of attack, and guessing is not part of it.

First, take the difference and divide it by nine. If it divides evenly, you almost certainly have a transposition, two digits swapped, $540 entered as $450. This is an old bookkeeping test and it still works because it is arithmetic rather than folklore.

Second, search your books for the exact amount of the difference. A single unrecorded transaction is the most common cause and the fastest to find.

Third, halve the difference and search for that. If the difference is exactly twice a transaction you can see, you have posted something in the wrong direction, a payment recorded as a deposit or the reverse.

Fourth, compare the transaction count rather than the totals. Your books have a number of entries for the month and so does the statement. If the counts differ by one and the totals differ by an amount you cannot place, you are looking for a single missing item and you can find it by comparing daily subtotals rather than individual lines.

Fifth, if it is still open, reconcile the previous period again. An unfound difference frequently belongs to a month you already closed.

What you must not do is create a balancing entry to force agreement. A suspense account with a genuine unknown in it, clearly labelled and cleared within the period, is honest bookkeeping. A plug entry that makes the number work is the single clearest signal an auditor can find that the books are not a record of anything.

What we saw go wrong, from the other side of the desk

Three patterns came up constantly in audit work, and all three start with reconciliation.

The owner’s personal account inside the business books. A business that reconciles one account cleanly and has a second account nobody mentions is the most common structural problem in small business files. Deposits flow between them and the trail breaks at the boundary. Mixing personal and business money is the error that widens an audit’s sampling faster than almost anything else.

Revenue recorded from deposits rather than from sales. If you book income when the money lands, your revenue equals your deposits by definition, and the reconciliation becomes circular. It will always balance and it will never be right. Sales are recorded from invoices or daily sales summaries. The bank is the check on that, not the source of it.

Reconciled once a year, in a panic, at year end. A year of unreconciled activity is not twelve times harder than a month, it is worse than that, because the errors compound and the memory that would have explained an odd transaction in February is gone by the following January. If your accounts have not been touched in a while, the honest fix is a structured rebuild rather than a long night, and we set out how that works in our guide to catching up on books that are behind.

How often, and for how long you keep it

Monthly is the standard for almost every small business, done within a week or two of the statement arriving so the transactions are still recent enough to explain. Businesses with high daily transaction volumes, particularly anything taking cash across a counter, benefit from a weekly merchant and deposit check between the monthly reconciliations.

Reconcile every account the business holds, not just the main operating one. Credit cards, the second chequing account, the savings account holding the tax money, and any payment processor that settles on a delay. A credit card is reconciled the same way and is the account most often skipped.

On retention, the general rule is six years from the end of the last tax year the records relate to, and the CRA sets it out on its page on where to keep your records and for how long. Two details on that page catch people out. If you file a return late, the six years runs from the date you filed rather than from the year end. And records originally produced in electronic format have to be kept in an electronic readable format even if you have paper printouts, so exporting your bank data before you close an account or switch software is not optional. We covered the full rule set in our guide to small business record keeping in Canada.

One more thing on that page that surprises owners: destroying records before the retention period ends requires written permission from the CRA, obtained through Form T137, and destroying them without it can be prosecuted.

What reconciling does not do

A reconciled account proves that every transaction in your books happened and that every transaction that happened is in your books. It does not prove that any of them are coded correctly. Coding starts with how you build your chart of accounts, because a transaction can only be as accurate as the categories it has to choose from.

A perfectly reconciled account can still have a truck purchase sitting in repairs, a shareholder draw sitting in wages, and a personal grocery run sitting in meals. Reconciliation is the completeness check. Coding is a separate review, and it is the one that determines what you actually pay. The two together are what make a set of books usable, and that pairing is the heart of ordinary small business bookkeeping in Canada.

Once the accounts are reconciled and coded, the reports finally mean something, and reading them monthly is where the actual business value sits. We wrote about turning that into a habit in our piece on the monthly financial review.

Frequently asked questions

What is a bank reconciliation in simple terms?

It is a comparison between your accounting records and your bank statement for the same account and the same period, where you match every transaction and explain every difference. When the explained differences fully account for the gap between the two closing balances, the account is reconciled. It proves your books reflect real money rather than intentions.

How often should a small business reconcile its bank account?

Monthly is the right cadence for almost every small business, completed within a week or two of the statement date while the transactions are still fresh enough to explain. Businesses handling high volumes of cash or card transactions should add a weekly check on merchant settlements and deposits. Reconcile every account, including credit cards and payment processors, not only the main operating account.

Does the CRA require a bank reconciliation?

The CRA does not name the reconciliation as a form you file, but it does require that your electronic records show an audit trail from supporting documents through to the summarized financial accounts, and bank statements, deposit slips and cancelled cheques are explicitly part of the records you must keep. The reconciliation is what connects those two ends. Without it, an auditor who cannot determine your income from your records is entitled to establish it by other methods.

What do I do if my bank reconciliation will not balance?

Work through a fixed order rather than hunting at random. Divide the difference by nine to test for a transposition, search your books for the exact difference, halve the difference to test for an entry posted in the wrong direction, compare the transaction counts on each side, then re examine the previous period. Never post a balancing entry to force agreement, because that converts a findable error into a permanent one.

How long do I have to keep bank statements in Canada?

Generally six years from the end of the last tax year the records relate to, and if you filed the return late, the six years runs from the date you actually filed. Records originally produced in electronic format must be kept in an electronic readable format, so a printed copy does not satisfy the rule on its own. Destroying records early requires written permission from the CRA through Form T137.

If the accounts have not been reconciled in a while

That is a common position and it is fixable. The work is mechanical rather than mysterious, and the sooner it is done the less of it there is. It is also squarely bookkeeping rather than accounting work, which matters if you are still deciding whether you need a bookkeeper or an accountant. If you would rather hand it over than spend the weekend on it, our bookkeeping service handles the monthly reconciliation as a matter of course, and we are happy to look at what shape your accounts are in before you commit to anything.