Your Books Can Be “Reconciled” and Still Be Wrong

A bank reconciliation is an important part of good bookkeeping, but it doesn't necessarily mean your books are accurate.

If you're a small-business owner using QuickBooks, you may assume that once your bank accounts reconcile, everything in your books must be correct.

Unfortunately, that's not always the case.

A bank reconciliation confirms that the transactions and balance recorded in your accounting system agree with the bank statement for a particular account and period.

But it doesn't tell you whether everything else in your accounting records has been recorded, categorized, and presented correctly.

That's why a proper bookkeeping review needs to go beyond simply asking:

“Does the bank balance match?”

The better question is:

“Do my financial statements accurately reflect what's happening in my business?”

What Does It Mean When Your Books Are Reconciled?

A bank reconciliation compares the balance and transactions in your accounting software with the corresponding bank statement.

When the account reconciles, you're confirming that the two records agree after accounting for legitimate timing differences and outstanding transactions.

This is an important internal control.

But reconciliation is only one piece of the bookkeeping process.

Think of it this way:

Reconciliation tells you that the bank account matches.

A financial review asks whether the accounting records make sense.

Those are two different questions.

How Can Books Be Reconciled and Still Be Wrong?

There are several reasons.

1. Transactions Can Be Categorized Incorrectly

A transaction can be entered into QuickBooks and still be assigned to the wrong expense account.

For example, a software subscription might be categorized as office supplies.

The bank reconciliation can still work perfectly.

But your financial statements aren't presenting the expense in the most appropriate category.

One incorrect transaction may not make much difference.

Hundreds of them can.

2. Personal and Business Expenses Can Be Mixed Together

This is especially common with small businesses.

A business owner may occasionally use a business credit card for a personal purchase or vice versa.

The transaction may be recorded and reconciled with the bank.

But that doesn't automatically make the accounting correct.

Personal transactions need to be properly identified and handled rather than simply being treated as business expenses.

3. The Balance Sheet May Contain Old or Incorrect Balances

This is one of the reasons I like to review the Balance Sheet rather than focusing exclusively on the Profit & Loss.

Look at accounts such as:

• Accounts receivable

• Accounts payable

• Credit cards

• Loans

• Fixed assets

• Other assets

• Other liabilities

• Owner's equity

Do the balances make sense?

Are there old amounts that have been sitting there for months or years?

Are loan balances being reduced properly?

Are credit card accounts actually accurate?

Are there assets on the books that the business no longer owns?

A reconciled bank account won't answer those questions.

4. Accounts Receivable Can Be Incorrect

Imagine your business shows $50,000 in accounts receivable.

That sounds like $50,000 of money coming your way.

But what if:

• Some invoices were already paid but weren't properly applied?

• Some balances are duplicates?

• Some invoices are several years old?

• A customer has a credit that hasn't been applied?

• The A/R aging report doesn't reflect what customers actually owe?

The bank account can reconcile perfectly while your accounts receivable is still inaccurate.

That's why reviewing your A/R Aging Report is so important.

5. Accounts Payable Can Have the Same Problem

The same concept applies to accounts payable.

If QuickBooks shows $25,000 in unpaid bills, you should know whether that $25,000 is actually owed.

Old bills, duplicate entries, credits, or payments that weren't properly applied can distort your A/P balance.

That can affect both your understanding of cash requirements and the accuracy of your financial statements.

6. Loan and Credit Card Accounts Need Attention Too

Your bank account may reconcile perfectly while a loan or credit card account is incorrectly recorded.

For example, a loan payment generally contains different components, such as principal and interest.

If the entire payment is recorded as an expense, your books may not accurately reflect the reduction in the loan liability.

Again:

The bank transaction can be correct.

The accounting treatment can still be wrong.

7. Your Financial Statements May Not Tell the Right Story

This is ultimately what I care about most.

Your bookkeeping isn't just about having transactions entered into QuickBooks.

Your financial statements should help you understand what's actually happening in your business.

Your Profit & Loss can help answer:

• Are sales increasing?

• Are expenses increasing?

• Are we profitable?

• Which expenses are changing?

Your Balance Sheet can help answer:

• How much cash do we have?

• Who owes us money?

• What do we owe?

• How much debt do we have?

• What does the business actually own?

Together, these reports provide a much more complete picture.

What Should You Review Besides Your Bank Reconciliation?

If you're a small-business owner, consider reviewing these areas regularly:

✓ Profit & Loss

Look for unusual changes in revenue, expenses, gross profit, and profitability.

✓ Balance Sheet

Look for old, unusual, or unexplained balances.

✓ Accounts Receivable Aging

Review who owes you money and how long invoices have been outstanding.

✓ Accounts Payable Aging

Review what you owe and what bills are coming due.

✓ Credit Card Accounts

Make sure balances and transactions are accurate.

✓ Loan Accounts

Confirm that principal and interest are being recorded appropriately.

✓ Owner's Equity

Make sure owner contributions and distributions are properly recorded.

✓ Uncategorized Transactions

Investigate transactions that haven't been properly classified.

The Question I Ask When Reviewing Books

I'm not just looking for mistakes.

I'm looking for things that make me curious.

For example:

Why did expenses increase 30%?

Why has accounts receivable been growing?

Why hasn't this balance sheet account changed in six months?

Why is there an old asset still on the books?

Why does the business show a profit but continue to struggle with cash flow?

Those questions can lead to some very important conversations.

Because sometimes the numbers aren't telling you that something is wrong.

They're telling you:

“Take a closer look.”

Reconciliation Is Important. It's Just Not the Finish Line.

A good bookkeeping process should include regular bank reconciliations.

But reconciliation shouldn't be the final step.

Your books should also be reviewed for:

Accuracy.
Consistency.
Completeness.
Reasonableness.

Most importantly, your financial statements should give you information you can actually use to run your business.

Because having books that reconcile is good.

Having books you can trust is better.

Frequently Asked Questions

Does a bank reconciliation mean my books are accurate?

No. A bank reconciliation confirms that the accounting records for a bank account agree with the bank statement after appropriate adjustments. It does not verify that every transaction is categorized correctly or that other balance sheet accounts are accurate.

What should I review after reconciling my bank account?

Review your Profit & Loss, Balance Sheet, accounts receivable, accounts payable, credit cards, loans, owner's equity, and any uncategorized or unusual transactions.

How often should a small business review its financial statements?

A monthly review is a useful practice for many small businesses because it allows problems and trends to be identified sooner rather than waiting until year-end.

Why is the Balance Sheet important for a small business?

The Balance Sheet provides a snapshot of what the business owns, what it owes, and the owner's equity. It can reveal issues that aren't obvious from the Profit & Loss or bank reconciliation alone.

Can QuickBooks be reconciled and still have errors?

Yes. QuickBooks can have reconciled bank accounts while transactions are miscategorized or other accounts contain inaccurate balances. Reconciliation is an important control, but it isn't a complete bookkeeping review.

The Bottom Line

Don't stop at “the bank reconciles.”

Ask whether your entire set of financial statements makes sense.

Your bookkeeping should do more than record what happened.

It should help you understand what is happening in your business and what deserves your attention next.

If you're unsure whether your QuickBooks file is giving you an accurate picture of your business, a professional bookkeeping review can help identify areas that deserve a closer look.

DeAnna Schillag Profit & Flow LLC helps small-business owners turn their accounting records into information they can actually use.

Clarity Today. Cash Flow Tomorrow. Success Always.

Website: www.dschillagprofitflow.com
Email: deannaschillagpf@gmail.com