6 Steps to help you reconcile your bank accounts in Xero

Managing your business finances effectively is crucial to maintaining financial health, and the bank reconciliation is one of the most important accounting tasks. In this article, we’ll walk you through the process of bank reconciliation in Xero, step by step.

What is Bank Reconciliation?

A bank reconciliation is the process of matching transactions in your accounting software with the actual transactions in your bank account. This helps to:

• Identify discrepancies like missing or duplicate transactions.

• Detect fraud or unauthorised transactions.

• Maintain accurate financial records for reporting and tax compliance.

By regularly reconciling your bank account, you ensure that your business has a clear and accurate picture of its financial position.

Having an incorrect bank reconciliation means your entire financial position is wrong, this may result in you making uninformed or incorrect decisions or when you want to pass your information to your tax accountant it can take a huge amount of time to correct, and time is money.

Step 1: Connect or Import Your Bank Transactions

Xero makes it easy to get your bank transactions into the system. There are two main ways to do this:

1. Set Up Bank Feeds: If your bank supports direct feeds to Xero, transactions will automatically import daily. This is the easiest and most efficient method.

2. Manually Import Bank Statements: If your bank doesn’t support automatic feeds, you can download your bank statement and upload it into Xero.

   It is particularly important when importing transactions to ensure that the statement balance is correct and that you have not duplicated or omitted transactions.

   
   

Step 2: Reconcile Transactions

You can navigate to reconcile your transactions through the dashboard or by selecting Accounting – Bank Accounts. If you have outstanding transactions to match it will have a blue square prompting you to reconcile items.

Xero uses smart algorithms to suggest matches or you can create your own bank rules to record transactions in Xero.

1. If Xero finds an exact match, simply click OK to reconcile the transaction. This isn’t fool proof, you should still check the transaction makes sense, especially if you are creating your own bank rules.

2. If multiple possible matches appear, review the options carefully and select the correct one.

3. If no match is found, you will need to create a new transaction manually by selecting create or transfer.

   
   

Tip: While you must enter the “Who” and “What” for each transaction, I would suggest utilising “Why” too. It may be obvious at the time, but when you look back months or years in the past you will thank yourself for saying why you spent money at a particular store. This is less important for recurring transactions, you may always know what your payment to Telstra is for, but invaluable when buying general items from a store like JB Hi Fi or Officeworks.

Step 3: Transfers between business bank accounts

If the transaction in your bank statement is a payment to another bank account recorded in Xero, you can use the transfer function. This will create an inter entity journal between the accounts and generate the transaction in your other bank account.

Tip: A common error in accounts is creating a transfer between accounts, but not reconciling in the other bank account.

Step 4: Use ‘Find & Match’ for Complex Transactions

Sometimes, a single bank transaction corresponds to multiple Xero transactions. In such cases:

1. Click Find & Match.

2. Select multiple invoices or bills that add up to the bank transaction amount.

3. Click OK to reconcile.

Tip: A common error when receiving a payment for multiple invoices is calling the cash received sales. The sale was already processed when the invoice was raised, by doing this you have doubled your income and recorded as if the client has not paid their invoice. This will not be picked up in a bank reconciliation but can be found when you check your Accounts Receivable.

Step 5: Review Your Bank Reconciliation Report and Correct Errors

Once all transactions are matched or created, it’s good practice to review the reconciliation report to ensure accuracy. You can find this under: Accounting > Reports > Bank Reconciliation Summary

The report will show:

• The balance recorded in your Xero accounts

• The statement balance for your bank account – This is particularly important when you first establish a data feed or when manually importing transactions. If it does not agree to your bank statement, something is wrong.

• Outstanding transactions that need review – Outstanding transactions could mean you have unreconciled lines in your bank account. If that is the case, go back and match them. Another variance can occur if you manually record a payment of an invoice or spend/receive money transaction.

  If you access the bank account, but instead of using the reconciliation menu you select “Account transaction” you will see a line or lines with a yellow status saying “Unreconciled”. Check to see if this is correct or if you need to remove and redo or void the transaction.

• Any discrepancies that require resolution – If your bank statement and the Xero account do not match it may mean you have recorded an error in your accounts. However, it isn’t always wrong if your Xero account doesn’t agree with the Statement. For example, I use Stripe as a payment service, when the client pays online it is posted directly into Xero, but it can take a few days to settle in my bank account. I would see a discrepancy for this payment, but it is correct.

Step 6: Finalise Your Reconciliation

If everything matches correctly, your bank balance in Xero should match the balance in your bank account, or you should be able to explain the variances. Congratulations! You’ve successfully reconciled your bank account.

Best Practices for Bank Reconciliation in Xero

To make reconciliation easier and more efficient, consider these best practices:

• Reconcile regularly: Daily or weekly reconciliation reduces errors and prevents a backlog.

• Keep supporting documents: Save invoices, receipts, and statements for future reference. Hubdoc is a great integration with Xero to help save receipts.

• Use bank feeds: Automating transaction imports saves time and reduces manual errors.

• Monitor for unusual transactions: Regular reconciliation helps detect fraud or unauthorised transactions early. It can also inform you of subscriptions that you have forgot you were still paying for unnecessarily.

Wrap Up

Bank reconciliation is a vital process for maintaining accurate financial records and ensuring smooth business operations. By following this step-by-step guide, you can easily reconcile your bank account in Xero, keeping your books accurate and up to date.

If you have questions, or want someone to handle this admin burden for you, please reach out to Bell Accounting WA.