The nine things it should include
- Every transaction coded to the right account, including the ones the bank feed guessed wrong.
- Every account reconciled to its statement: checking, savings, credit cards, loans and merchant accounts.
- A profit and loss for the month and the year to date.
- A balance sheet that ties to your bank and loan statements.
- Owner activity recorded as equity. Draws, distributions and money you put in are not income or expenses.
- Loan payments split between principal and interest. Only the interest is an expense.
- Payroll entries from your payroll provider’s reports, so wages and payroll taxes match the W-2s and 941s.
- Sales tax recorded as a liability and tied to the New Jersey or New York return that was filed.
- One list of open items, such as a deposit to identify or a receipt to find, instead of a stream of emails.
What reconciled actually means
Categorizing is deciding what a transaction was. Reconciling is proving the books agree with the bank. Each month the ending balance in your books for every account has to match the ending balance on the statement, with every difference explained. It is the step that catches a deposit recorded twice, a transfer booked as a sale, or a charge that came through the bank feed and a receipt app at the same time. Most banking apps and many low-cost services categorize. Far fewer reconcile.
A worked example
Alexander runs a contracting company taxed as an S Corporation. His books are categorized from the bank feed every month but have never been reconciled, and they show $142,000 of net income for the year. Reconciling the twelve months turns up four errors.
| Net income in the categorized books | $142,000 |
| Transfer from savings coded as a sale | ($15,000) |
| Truck loan principal coded as an expense | $9,600 |
| Personal charges on the business card coded as supplies | $6,200 |
| Equipment purchase recorded twice | $4,800 |
| Net income after reconciling | $147,600 |
| Errors found | $35,600 |
The bottom line moved only $5,600, which is why the books looked fine. But $35,600 of errors ran in both directions. Filed as is, the return would have reported a $15,000 sale that never happened, deducted $20,600 that was not deductible, and carried a truck loan balance that never went down. The $6,200 of personal charges also belongs on the books as a distribution to Alexander, which matters for his basis in the S Corporation. Found in the month, each fix takes minutes. Found in March, it is a cleanup project billed before the return can start.
Red flags in your current books
- An “uncategorized” or “ask my accountant” account with a balance in it.
- A cash balance in the books that does not match the bank.
- Negative balances where there should not be any. Negative cash when the account was never overdrawn, a credit card or loan with a debit balance, or negative accounts payable or inventory. Each one means something was posted to the wrong account or posted twice.
- Reconciliation discrepancies. A “reconciliation discrepancy” or “opening balance equity” entry, or old uncleared checks and deposits carried month after month. They are differences someone forced to make the reconciliation balance instead of finding.
- A loan whose balance never changes, or changes by the full payment.
- Owner draws showing up as expenses.
- Sales tax payable that does not match the returns you filed.
- Reports that arrive months late, or only when you ask.
What you do each month
Send your statements by the 5th, answer the open-items list, and spend ten minutes with the profit and loss. That is the owner’s whole job. For what this costs in Bergen County, see our bookkeeping cost guide.
This guide is general information based on the law as of the date above, not advice for your situation. Tax rules change, and the right answer depends on your numbers.