Bank Feeds vs Reconciliation: Do You Still Need to Reconcile?

Is a bank feed the same as a reconciliation?

No. A bank feed copies the lines the bank posted into your books. A reconciliation checks your books against the bank's own statement and explains every difference. The IRS gives three purposes for reconciling a checking account: to verify how much money is in the account, to make sure the books show all bank charges and the correct balance, and to correct errors in the statement, the checkbook and the books (Publication 583). A feed supplies lines; it does not check them against the statement, so it does none of the three on its own.

A case is not simple when money moves outside the bank (cash sales, cash paid out), a payment processor pays out net of fees, several accounts feed one set of books, someone edited a month after it was closed, or an earlier reconciliation was forced to balance with an unexplained entry. Each can hide a difference that a feed never shows.

Gather first: the bank's own monthly statements (not the software's copy of them), the reconciliation report for each month, and the list of items marked excluded or deleted.

So a connected account still needs its own monthly reconciliation. If your totals already do not match, a past month was forced to balance, the feed has a gap or month-end takes a weekend, the books may need more than a monthly check; see "Different for you?" at the end.

Do you have to reconcile every month if your bank is connected to your accounting software?

Reconcile monthly: Publication 583 says you should reconcile the business checking account each month and makes no exception for an account connected to software (Publication 583). It is advice, not a stated deadline. What the law requires is books that show gross income, deductions and credits and that support what the return reports (Publication 583). Reconciling is how an owner finds out whether the books do that.

A feed is only one way to enter transactions. The IRS says taxpayers are responsible for maintaining the books and records that support their returns (IRS: electronic accounting records FAQ), and records kept in software must be able to support and verify the entries on the return (Publication 583). For how long to keep electronic records, see how long to keep business records.

A monthly rhythm matches the statement cycle, so a difference is one month of items, not a year's.

What can a bank feed miss or get wrong?

A feed can import a line twice, skip lines, carry the bank's date instead of yours, and never see money that did not pass through the bank. Missing or duplicated bank lines show up on a reconciliation as a difference between the books and the statement. Cash that never touched the bank can be missing from both and leave no difference; it needs its own records.

Which year an item belongs to depends on the accounting method; see cash or accrual for a small business.

See income counted twice in your books, a bank feed that stopped importing and recording cash sales.

What goes wrong if you never reconcile?

Three things: wrong profit, errors you do not see, and a weak record.

Wrong profit. Any duplicate, gap or missing fee coded to income or expense flows into the profit and loss statement the return is built from. Profit that is too high can mean tax on income that was not earned, if the return follows the books. Profit that is too low can mean an underpayment on the owner's return (the partners' or S corporation shareholders', for those entities) or a C corporation's, and the IRS accuracy-related penalty is 20% of the portion of an underpayment attributable to negligence or disregard of the rules, or to a substantial understatement of income tax. The substantial-understatement test differs for individuals and corporations. The IRS describes negligence as not making a reasonable attempt to follow the tax laws (IRS: Accuracy-related penalty). Whether books nobody checked amount to negligence depends on the facts, and the IRS may remove or reduce a penalty when you acted in good faith and show reasonable cause.

Errors and fraud you do not see. A balanced reconciliation does not prove each payment was authorized. An unauthorized withdrawal, a bank error or an unexpected fee can reach the books through the feed at the statement's amount and leave no difference. Read every payment on the statement for authorization and support, and report anything suspect to the bank at once. The time to report some of these is limited; see the section on unauthorized transactions below.

A weak record if the IRS asks. In examinations of small businesses and self-employed taxpayers who keep books in software, the IRS says it asks early for the software backup file in most cases, and likely in a broad audit; a narrow audit of one item may not. It uses the software to test how reliable the records are. If a taxpayer declines to provide records, the IRS says it can summons them, reconstruct income by an indirect method or disallow items for lack of substantiation (IRS: electronic accounting records FAQ). A reconciliation is how you test the books against the statements before anyone else does. For the audit itself, see an IRS audit of a small business.

How do you reconcile a month, step by step?

Match the books to the bank's statement for the month and explain every difference. Correct missing or wrong entries; list genuine timing differences on the reconciliation without entering them again. Steps 3, 4 and 6 to 8 follow the IRS steps in Publication 583, applied to accounting software.

1. Get the statement the bank issued for the month. Use its ending balance, not a figure from the feed.
2. Check the opening balance. The reconciliation's beginning balance (the items already cleared) should equal last month's statement ending balance. If it does not, a reconciled month was changed; see a reconciliation beginning balance that is wrong.
3. Compare the statement's deposits with the books' deposits and note each difference in amount.
4. Compare each payment that cleared, by check number and amount, with the books. For each entry with no match on the statement, check that it is real and has not cleared yet; that is outstanding, such as a check not yet cashed. A duplicate or other error is not a timing item: correct it.
5. Read the list of items marked excluded. Each should match an entry already in the books.
6. Prepare the reconciliation: the statement ending balance, plus deposits not yet on it, minus outstanding payments.
7. Enter what the books lack, such as bank service charges, and correct what was recorded wrongly.
8. Confirm the adjusted statement balance equals the adjusted books balance. If not, go back through the earlier steps. Do not force a match with an unexplained entry: it only hides the difference.
9. Save the reconciliation report with the statement.

Do this for every account that feeds the books, including cards; see card payments in the books. For the rest of the close, and for a difference that remains, see the month-end close checklist.

Does a balanced reconciliation mean the categories are right?

No. A reconciliation proves the cash, not what each entry is. An entry in the wrong category moves the same money, so the account still balances.

The IRS suggests noting the source of each deposit (business income, personal funds or a loan) so you can separate business from nonbusiness receipts and taxable from nontaxable income. In its example, a personal expense paid from the business account would be recorded but could not be deducted (Publication 583).

In a corporation, a personal bill paid from the company account is usually recorded as a shareholder loan or a distribution, not as an expense; see loans to shareholders on the balance sheet.

After each reconciliation, read the deposits by source and the profit and loss statement line by line. See a profit and loss statement that looks wrong, uncategorized expenses before tax time and personal expenses paid from the business account.

Do you have to reconcile sales deposits against sales?

Publication 583 does not list it as a step, but it is a useful second check. The bank reconciliation shows that the deposits are in the books. It does not show that the deposits equal the sales.

Deposits and sales differ for ordinary reasons: fees, refunds, sales tax collected, timing and cash sales. For how to match them, see reconciling sales and payouts and, for a balance that never clears, the undeposited funds balance.

Do you still need receipts if the bank feed shows the payment?

Yes. Proof of payment by itself does not establish a deduction. The IRS says to keep other documents, such as invoices and credit card slips, to show that you incurred the cost (Publication 583). A bank line shows who was paid, how much and when, not what was bought or why.

A highly legible bank statement may prove payment in place of a canceled check when it shows the required details (Publication 583), so keep the statements, not only the feed. Travel, gift and car costs have stricter rules. For what a receipt must show, see IRS receipt requirements; for a simple system, see record keeping for the self-employed; for receipts already lost, see lost receipts for business expenses.

How long do you have to report an unauthorized transaction on a business account?

Start with the deadline in the bank's account agreement. The 60 days window people quote for bank accounts comes from Regulation E, which covers consumer accounts, not business accounts.

Regulation E applies to an account established primarily for personal, family or household purposes (12 CFR 1005.2) and to electronic fund transfers (12 CFR 1005.3). For a covered account, an error includes an unauthorized electronic fund transfer, and the bank's duties to investigate apply to a notice it receives no later than 60 days after it sends the statement that first shows the error (12 CFR 1005.11).

An account opened for business is generally outside that rule. Read the account agreement for the notice deadline and how to report, and report the day you see the item. State law adds its own limits for checks. Ohio's version of the Uniform Commercial Code, for example, requires a customer to examine statements with reasonable promptness and tell the bank of a forged signature or altered check, and bars a claim not discovered and reported within 1 year after the statement or items are made available (Ohio Revised Code 1304.35). That is an outer cutoff, not a safe waiting period: a claim can be barred sooner when the delay costs the bank money, including repeat items from the same wrongdoer. Other states and account agreements differ. Cards have their own dispute rules; this section covers bank accounts. The Regulation E clock starts when the bank sends the statement, not when you open it. The rule looks at the purpose an account was established for, so if you run the business through an account opened as personal, ask the bank how it classifies the account.

Why does month-end close take all weekend, and how do you shorten it?

Do the work in small pieces through the month, so the reconciliation is the last check, not the first look. A close takes a weekend when a month of lines is reviewed at once, older differences are still open, and nobody owns the date.

• Review the feed weekly. Accept, categorize and question lines while you still remember them. The IRS advises recording expenses when they occur and identifying the source of recorded receipts, generally on a daily basis (Publication 583).
• Reconcile when the statement closes. One account at a time, oldest month first, because each month starts from the last.
• Read what your rules did. Rules that categorize repeat vendors save time; once a month, scan their results for miscoded lines.
• Name one owner and one close date. Lock the month once it ties; see the closing date after taxes are filed.
• Keep a short open list. An item you cannot explain after two tries goes on the list, not into an entry made only to force a match.

If the books are months behind, a faster routine will not fix them; see catching up on overdue books.

Example

These examples are illustrative and use US dollars.

A shop owner never opens the statement

A retail shop's owner accepts suggested matches and never opens the statement. December books show US$18,400 in checking. The bank statement ends at US$15,950, and nothing is outstanding. The US$2,450 difference is a US$1,500 deposit imported twice and US$950 of processor fees still sitting in the review list. The duplicate deposit was coded to sales, so December profit is overstated by US$2,450: US$1,500 of income that never happened and US$950 of missing expense. Deleting the second deposit and entering the fees brings both balances to US$15,950.

A consultant's feed stops for three months

A consultant's feed disconnects for three spring months. Client payments were entered from invoices, but US$9,000 of expenses paid from the account never reach the books. Profit is overstated by US$9,000 and the books' cash is US$9,000 above the statement. The next reconciliation shows the gap. Each expense added from the statements still needs its invoice or receipt.

A personal transfer coded as sales

An owner moves US$5,000 from a personal account into the business account, and the transfer is accepted as sales. The reconciliation balances to the cent, because the money is in the account. Income is overstated by US$5,000 until someone reads the deposit by source and records it as an owner contribution or loan. If last year's books held the transfer as sales, check whether the filed return included it; if so, the return may need correcting. See owner contribution or loan to your LLC.

Different for you?

• The totals do not match, or a past month was forced to balance with an unexplained entry: the books may need to be rebuilt from the bank statements, and someone has to own the monthly close, before the next return uses these numbers. See rebuilding books from bank statements and bookkeeping help with the rebuild and the monthly routine.
• Month-end takes a weekend, or nobody owns it: the month-end close checklist lists the steps; if nobody owns the routine, see bookkeeping help with a monthly close.
• The feed has a gap: see a bank feed that stopped importing. Whether the months it missed need a rebuild from statements is a question for bookkeeping help with the missed months.
• The books are months behind: see catching up on overdue books.
• A return is due and the books are unreconciled: see the bookkeeping cleanup checklist.
• A return was filed on books that turn out to be wrong: the return may need correcting. For a Schedule C filer, see amending a return for business expense mistakes. For a partnership or S corporation whose K-1s went out, see correcting a filed business return.
• The IRS asked for your books: see an IRS audit of a small business and an IRS notice to your business.
• Personal and business money share an account: see fixing commingled business and personal funds.
• Someone else keeps the books: see checking your bookkeeper's work.
• An unauthorized transaction hit a business account: report it to the bank the day you see it, and read the account agreement for its deadline; see the deadline section above.