What Is a Reconciliation?
A reconciliation is a process of checking a general ledger (GL) account balance against an independent source document (such as a bank statement). The goal of a reconciliation is simple: to ensure the accuracy of a Balance Sheet account balance as of a specific date (usually the last day of each month).
In small business bookkeeping, reconciliations often begin and end with bank and credit card accounts. You match the QBO feed to the bank statement, see the green checkmarks, and call the reconciliation “done.”
However, in corporate accounting, a month-end reconciliation process isn’t complete until EVERY SINGLE balance sheet account has been reconciled against a statement, subledger, or supporting schedule.
Small businesses likely do not need massive, complex reconciliation files like large corporations, but I strongly believe that reconciling more than just bank and credit card accounts, and doing it correctly strengthens confidence in the accuracy of your financial statements.
Why is reconciliation so important?
Having worked in corporate accounting, I am passionate about reconciliations because they help catch errors and yet, so many people do them incorrectly (often without even knowing it!).
Because of the double-entry accounting system (debits and credits), one incorrect Balance Sheet account balance means there is somewhere else that is also incorrect. An expense might be duplicated or missing on the P&L, revenue might be understated, or a liability balance might quietly accumulate over time due to incorrect recording.
Reconciliation is what catches these errors.
A Real-World Example: How a Reconciliation Caught a Missing 401(k) Contribution Payment
Recently, I was reconciling a 401(k) liability account on a client’s Balance Sheet. This specific account houses three types of transactions:
- Employee Payroll Deductions: Deductions from employee paychecks for employee 401(k)contributions [Liability increases]
- Company Contributions: Employer match portion [Liability increases]
- Contribution payments Sent to the 401(k) Provider: Remittances paid out [Liability decreases]
As payroll runs and contributions are sent to the provider, these transactions should offset to $0.00 each pay cycle.
During the reconciliation process, I noticed the combined total of employee deductions and company match (Item ①+②) did not match the actual contribution payment sent to the provider (Item ③).
It turned out that a portion of the contribution payment to the 401(k) provider was missing.
Because I reconciled the liability account monthly, I caught the discrepancy within a month, reached out to the provider, and had the additional missing contribution posted.
- If I didn’t reconcile this account monthly: the process would have gotten overwhelming quickly because I would have ended up with a high volume of transactions to review and reconcile all at once at year-end, not catching the error timely.
- If I didn’t reconcile this account at all: The missing contribution wouldn’t have been caught internally. The client would have had to rely on an employee noticing the missing contribution in their personal 401(k) account – even though money was deducted from their paycheck (it does happen, but this creates an uncomfortable situation that damages employee trust and reflects poorly on the business).
Even though the 401(k) contribution process was fully automated through a direct integration between QBO Payroll and the provider, unexpected sync errors can still occur. This is exactly why monthly reconciliations are so vital: they verify that your automated tools are actually doing what you expect them to do.
Most Repeated Reconciliation Mistakes
Over the years working with entry-level bookkeepers and corporate accountants, these are the three most common reconciliation mistakes I see:
1. Stopping at Bank & Credit Card Accounts
Simply categorizing bank and credit card feeds and reconciling those accounts in QBO does not guarantee that the rest of the books are accurate.
Security Deposits, Payroll Liabilities, and Loan accounts may still be misstated. Clearing account balances may be piling up.
2. Just Excluding Unmatched Transactions in QBO & Stopping There
In QBO’s reconciliation screen, when transactions don’t match the ending balance, some will check off remaining items and “just exclude” to force a $0.00 difference. Excluding transactions without investigating defeats the entire purpose of a reconciliation.
Every reconciling item (the transactions causing the difference between the GL balance and your source), needs to be supported and understood.
3. Comparing GL Balances to GL Transactions
This happens surprisingly often, even among corporate accountants! If you export the detail of a QBO general ledger account and compare it against the GL balance, of course they tie out ☺, you are just comparing transactions to the total balance of those transactions themselves.
A true reconciliation compares the GL balance to an external source (e.g. an external vendor portal, loan statement, or supporting Excel schedule).
How to Start Reconciling Balance Sheet Accounts Correctly in QBO
You don’t need a complex system to reconcile balances correctly – you can use QBO’s native reconciliation feature most of the time. Here is a simple 3-step process:
Before you start the reconciliation process, gain a clear understanding how the account is used and what the balance represents. Understand the nature of transactions going in and out of the account.
- Bank, Credit Card, and Loan Accounts (Business Loans or Vehicle Financing): Take the ending balance from the statement, enter the balance and date into the QBO reconciliation page, and select the transactions listed on the statements.
- Security Deposits, Other Current Assets/Liabilities: Review what makes up the balance and calculate the expected balance (you can also create a supporting schedule in Excel to support the expected balance). For example, if a Security Deposit account consists of a $1,000 deposit for the current leased office space, enter $1,000 as your expected/supported balance, then reconcile items in the account against the balance.
- Clearing Accounts & 401(k) Liabilities: For accounts designed to clear out regularly, it is often best to set $0.00 as your target balance in QBO to verify that all ins and outs offset completely.
Reconciling items refer to any specific transaction, timing difference, missing payment, or error causing a variance between your expected balance and your GL balance (e.g. outstanding checks, deposits in transit, or missing 401(k) contributions).
- If there are transactions not selected during your QBO reconciliation, they are reconciling items.
- If missing transactions are causing a difference, those are also reconciling items.
All reconciling items must be reviewed to confirm if they are valid.
For example, if your Security Deposit account contains deposits for your current lease plus an old, unused lease, investigate whether that old deposit was returned or needs to be written off to expense.