BANK AND CREDIT CARD RECONCILIATION

A reconciliation compares the balance in the business's books with the balance on the bank or credit card statement and explains every difference. It is the single most effective check a sole proprietor can do: it catches missed transactions, duplicate entries, bank errors, unauthorized charges and personal spending that has slipped into the business accounts. This page explains how often to reconcile, the step-by-step method, the usual reconciling items and the entries they require, and how to handle credit cards and payment processors.

HOW OFTEN TO RECONCILE

• Monthly: reconcile every business bank account and credit card as soon as each statement is available. Small differences are easy to trace within a month and very hard to trace after a year.

• Before each GST/HST return: reconciling first makes sure all sales and input tax credits for the period are recorded.

• At year end: the December 31 balances on the balance sheet must agree with the statements before Form T2125 is prepared.

THE METHOD, STEP BY STEP

• Step 1, start with the statement: take the ending balance on the bank statement.

• Step 2, add deposits in transit: deposits recorded in the books that the bank had not processed by the statement date.

• Step 3, subtract outstanding payments: cheques written and payments recorded in the books that had not cleared the bank by the statement date.

• Step 4, adjusted bank balance: the result is what the bank balance would be if every recorded item had cleared.

• Step 5, adjust the book balance: take the balance in the books and add or subtract items that appear on the statement but have not yet been recorded, such as bank fees, interest earned, automatic payments and returned (NSF) cheques.

• Step 6, compare: the adjusted bank balance and the adjusted book balance must be equal. Any remaining difference is an error to find and correct.

COMMON RECONCILING ITEMS

• Timing differences: deposits in transit and outstanding cheques need no entry, because they will clear in the next period. They should be checked the following month to make sure they did.

• Bank charges and interest: service fees are recorded as an expense on line 8710; interest earned on the business account is other income.

• NSF cheques: a customer cheque returned unpaid is reversed by putting the amount back into accounts receivable, along with any NSF fee charged by the bank.

• Pre-authorized payments: insurance, loan payments and subscriptions taken automatically must be recorded if they were missed.

• Recording errors: transposed figures (such as $1,520 entered as $1,250), duplicates and amounts posted to the wrong account. A difference divisible by 9 often points to a transposition.

• Personal transactions: personal purchases from the business account are recorded as drawings; business costs paid from a personal account are recorded as owner contributions.

WORKED EXAMPLE

At March 31, the business chequing statement shows $8,420 and the books show $7,900.

• Bank side: $8,420 + deposit in transit of $1,200 − outstanding cheque of $1,800 = $7,820.

• Book side: $7,900 − monthly bank fee of $30 − pre-authorized insurance payment of $50 not yet recorded = $7,820.

• Result: both sides agree at $7,820. Entries are made in the books for the $30 bank fee and the $50 insurance payment; the deposit and cheque need no entry.

CREDIT CARDS

• Same method: the statement balance owing is reconciled to the credit card liability account, allowing for charges and payments in transit.

• Record each charge: each business purchase is recorded as an expense or asset, with the GST/HST shown on the receipt recorded separately for input tax credits. The monthly payment from the bank account is not an expense; it reduces the liability.

• Personal charges: personal purchases on a business card are recorded as drawings. A separate card used only for the business avoids this.

• Interest and annual fees: interest on a card used for the business, and the card's annual fee, are deductible business costs.

PAYMENT PROCESSORS AND MARKETPLACES

• Clearing account: services such as Square, Stripe, PayPal or Shopify deposit sales net of fees, often in combined batches. Use a clearing account so that gross sales, processing fees and refunds are each recorded in full.

• Gross, not net: sales are recorded at the full amount charged to customers, and processing fees as an expense. Recording only the net deposit understates both revenue and expenses, and the CRA receives platform data showing gross sales.

• Reconcile the processor too: the processor's monthly report should be reconciled to the clearing account, and the clearing account should return to zero once payouts reach the bank.

KEEPING THE RECONCILIATIONS

• File each one: save each month's reconciliation with the statement, as part of the business records.

• Sign off: note the date it was completed and any unresolved items to follow up.

• Watch for stale items: cheques outstanding for more than six months should be investigated, and payments that never cleared should be reversed.

KEY POINTS

• Monthly, every account: including credit cards and payment processors.

• Two kinds of items: timing differences need no entry; unrecorded bank items do.

• Record gross sales: processor fees are an expense, not a reduction of revenue.

• Personal items go to equity: drawings or owner contributions, not expenses.

SOURCES

• Canada Revenue Agency: Keeping records, and Guide RC4409, Keeping Records.

• Canada Revenue Agency: Guide T4002, Line 8710, Interest and bank charges.