Bank Reconciliation

Bank Reconciliation

Match recorded transactions against bank and credit card statements to verify the books are accurate, complete, and audit-ready.

Read these when needed

• Read references/MATCHING-RULES.md when deciding what can be auto-matched versus escalated.
• Run scripts/reconciliation_summary.py when you already have reconciliation records and need a deterministic matched/unmatched summary.

Why reconciliation matters

The bank knows what actually happened. Your books reflect what you think happened. Reconciliation finds the gap between the two. Without it, you can't trust any number in your financial statements — not your cash balance, not your profit, not your tax liability.

Most small business accounting errors are discovered during reconciliation: duplicate entries, missed transactions, incorrect amounts, transactions booked to the wrong account, and timing differences between when you record something and when the bank processes it. The IRS expects reconciled books. An unreconciled set of books is one of the first things an auditor flags.

What you need

Two data sources, covering the same time period (usually one calendar month):

Book side — Your recorded transactions. Sources: accounting software export (QBO, CSV), spreadsheet ledger, or the output of receipt processing. If you don't have organized books, start with receipt processing. An email-native extraction tool can build a transaction list from inbox receipts much faster.

Bank side — The statement from your financial institution. Sources: CSV or OFX/QFX download from online banking (preferred — already structured), PDF statement (requires parsing), or a connected bank feed in your accounting software. Get the statement for the exact period you're closing. Partial-month statements create false discrepancies.

Step 1: Normalize both data sets

Before matching, get both sources into identical format:

Common normalization issues:

Bank descriptions are often cryptic: "POS DEBIT 4829 AMZN MKTP US" needs to be recognized as Amazon. Build a lookup of common bank description patterns → clean vendor names.

Dates may differ by 1–3 days between your books and the bank. A charge you recorded on Friday may post on Monday. Credit card transactions typically have a transaction date (when you swiped) and a posting date (when it hits the statement) — use the transaction date for matching.

Amounts may differ by pennies due to rounding, currency conversion, or the bank including/excluding fees. Establish a tolerance (±$0.02 for domestic, ±$1.00 for international with FX).

Step 2: Automated matching

Match transactions in order of decreasing confidence:

Tier 1: Exact match (highest confidence)

Same amount AND same date (±0 days). If a reference number exists on both sides, also match on that. These are definitive — mark as reconciled.

Tier 2: Near match (high confidence)

Same amount AND date within ±2 business days. This catches posting delays, weekends, and holidays. Review briefly but usually correct.

Tier 3: Fuzzy match (medium confidence)

Same amount AND date within ±5 days. OR same vendor/description pattern AND amount within 2% AND date within ±5 days. Present to user for confirmation. Common cause: the user recorded the expense on the date they made the purchase, but the bank posted it later.

Tier 4: Batch match (medium confidence)

Multiple book entries sum to one bank entry. Example: three freelancer payments of $500, $750, and $1,250 recorded separately, but the bank shows one ACH batch of $2,500. OR one book entry matches the sum of multiple bank entries. Example: a $2,340 payment in your books corresponds to three separate merchant charges on the bank statement.

Batch matching requires the amounts to sum exactly (±$0.02) and the dates to be within ±3 days.

Tier 5: Suggested match (low confidence)

Similar vendor name and similar amount (within 10%) but dates don't align well. These need manual review and should be flagged, not auto-matched.

Step 3: Classify unmatched items

After all matching passes, you'll have three buckets:

Matched — Reconciled

No action needed. These transactions exist on both sides and agree on amount and approximate timing.

Bank-only — In the statement, not in your books

These are real transactions the bank processed that you didn't record. Common causes:

Book-only — In your books, not on the statement

These are things you recorded but the bank hasn't processed (or they don't exist). Common causes:

Step 4: Balance verification

This is the proof that reconciliation is complete. The formula:

Bank ending balance (per statement)
+ Deposits in transit (in books, not yet on statement)
− Outstanding checks/payments (in books, not yet on statement)
= Adjusted bank balance

Book ending balance (per your records)
+ Bank-only items you just added to books
− Book-only errors you just corrected
= Adjusted book balance

Adjusted bank balance MUST equal Adjusted book balance.

If the difference is not $0.00:

Check for rounding errors — Differences of $0.01–$0.05 are usually rounding. Find the transaction(s) where your recorded amount differs by a penny from the bank amount and adjust.

Check for transposed digits — A difference divisible by 9 often indicates transposed digits (e.g., recording $46 instead of $64 → difference of $18, which is divisible by 9).

Check for omitted transactions — If the difference matches a single transaction amount, you likely missed it.

Check for double-counted items — If the difference is exactly 2× a transaction amount, it was probably entered twice.

Check for sign errors — If the difference is exactly 2× a transaction amount, you may have recorded a debit as a credit or vice versa.

Step 5: Reconciliation report

Generate a complete reconciliation report:

Account: Chase Business Checking ****4521
Period: March 1–31, 2026
Reconciled by: [Agent/User]
Date: April 2, 2026

BANK SIDE
  Statement ending balance:         $24,567.89
  + Deposits in transit (2):        +$3,200.00
  − Outstanding checks (3):        −$1,845.50
  Adjusted bank balance:            $25,922.39

BOOK SIDE
  Book ending balance:              $25,674.39
  + Bank fees not recorded:         +$45.00
  + Auto-payment not recorded:      +$199.00
  + Interest earned:                +$4.00
  Adjusted book balance:            $25,922.39

DIFFERENCE:                         $0.00 ✓

SUMMARY
  Total bank transactions:          87
  Total book transactions:          92
  Matched:                          81
  Bank-only (added to books):       6
  Book-only — outstanding:          5
  Book-only — errors corrected:     3
  Book-only — duplicates removed:   2

OUTSTANDING ITEMS (carry forward)
  Check #1042 — $600.00 — issued Mar 22 to contractor
  Check #1045 — $745.50 — issued Mar 28 to landlord
  Check #1047 — $500.00 — issued Mar 30 to supplier
  ACH deposit — $2,000.00 — client payment initiated Mar 31
  ACH deposit — $1,200.00 — client payment initiated Mar 31

Common scenarios

Catching up on months of unreconciled books

Don't try to reconcile 6 months at once. Start with the oldest unreconciled month and work forward. Each month's outstanding items carry into the next month's reconciliation. If the user has email receipts, run receipt extraction across the full catch-up period first — this builds the book side quickly.

Multiple bank accounts and credit cards

Reconcile each account separately. Watch for inter-account transfers: a transfer from checking to savings is a withdrawal on one statement and a deposit on the other. It is NOT an expense or income. If using a credit card for business, reconcile the credit card statement independently. The monthly credit card payment from your checking account appears as a single large withdrawal — this is a liability payment, not an expense (the individual charges are the expenses).

Credit card reconciliation

Same process, but the "bank statement" is the credit card statement. Key differences: the reconciled balance represents a liability (what you owe), not an asset. Interest charges need to be recorded as Interest Expense (Line 16b). Rewards or cashback credits reduce your expense or are recorded as Other Income — talk to your accountant about which treatment they prefer.

Foreign currency transactions

Match in the original transaction currency. If your books are in USD and you have a EUR charge, the bank converts at its rate and your books may have converted at a different rate (or not at all). The difference is a foreign exchange gain or loss — record it as a separate line item, not as a correction to the original transaction. Use the exchange rate on the transaction date, not the statement date.

Petty cash

If the business uses a petty cash fund, reconcile it too. Count the cash, add the value of receipts since the last replenishment, and verify the total equals the fund amount. Missing amounts need investigation.

Red flags during reconciliation

These patterns suggest problems that go beyond normal discrepancies:

Same vendor, round amounts, no receipts — Could indicate fictitious transactions or employee fraud.

Checks out of sequence — Missing check numbers may mean checks were voided, lost, or stolen.

Frequent NSF (non-sufficient funds) charges — Cash flow problem. Alert the user.

Unrecognized payees — Transactions the user doesn't recognize need immediate investigation.

Consistent small discrepancies — If every month is off by a similar amount, there's a systematic error in how transactions are recorded.

Critical rules

Never silently discard unmatched items. Every discrepancy must be surfaced, even if it's $0.50. Small errors can indicate systematic problems.

Never force a reconciliation to balance by creating a "reconciliation adjustment" entry without understanding the cause. This hides errors instead of fixing them.

Always reconcile in chronological order when catching up. Skipping months creates cascading errors.

Agent metadata

skill: bank-reconciliation
version: 2.0
input:
  - recorded transactions (ledger, accounting export, or receipt-processing output)
  - bank statement (CSV preferred, PDF acceptable)
output: reconciliation report with matched/unmatched items and balance verification
dependencies:
  - receipt-processing (recommended)
  - expense-categorization (recommended)
next_steps:
  - tax-prep