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Your bank statement and accounting software should generally reflect the same underlying transactions. But what happens when the balances do not match?
A difference does not necessarily mean that money is missing. It can result from timing differences, missing transactions, duplicate entries, incorrect amounts or transactions that have not been matched correctly.
For Australian businesses, identifying these differences is important because accurate financial records help support the income and expenses reported in a Business Tax Return. They can also make it easier to review business expenses, prepare BAS information where applicable and keep supporting records organised.
In this guide, we explain why your bank balance may differ from your accounting software and what you can do to identify and correct the problem.
Your bank balance and accounting records can differ when transactions have not been recorded, cleared or matched correctly.
Common causes include:
Finding the reason for the difference is important before relying on your accounting records for tax preparation or other financial reporting.
Bank reconciliation involves comparing the transactions recorded in your accounting software with the transactions shown on your bank statement.
You generally check payments, deposits, transfers, bank charges and other transactions to make sure they have been recorded correctly.
Regular reconciliation can help identify missing or duplicated transactions and incorrect entries before they affect your financial records.
For a business owner preparing a Business Tax Return, having accurate records can also make it easier to review business income, expenses and supporting documentation.
There are several reasons why your bank balance may not agree with the balance shown in your accounting software.
A payment may have been entered into your accounting software but may not have cleared the bank yet.
This can create a temporary difference between the accounting balance and the bank statement. Once the transaction clears, the difference may disappear.
Some transactions can appear on your bank statement before they are entered into your accounting system.
These may include bank fees, direct debits, interest or other business transactions.
If they are not recorded, your accounting records may not reflect the actual movement of money through the business.
A transaction can sometimes be recorded more than once.
For example, a payment imported through a bank feed may already have been entered manually. If both entries remain in the accounting system, your records may show a different balance from the actual bank account.
Entering an amount that differs from the actual bank transaction can also create a mismatch.
Even a small error can become difficult to identify when there are many transactions. Comparing the accounting entry with the original bank statement can help locate the difference.
Bank feeds can make recording transactions more convenient, but imported transactions still need to be checked and matched correctly.
A transaction may not import correctly or may require manual entry.
If an item is missing from the accounting records, the software balance may differ from the bank balance.
A bank transaction may be matched with the wrong invoice, bill or existing accounting entry.
This can leave transactions unreconciled and may affect the accuracy of your business records.
Transactions should also be assigned to the appropriate account.
For example, an expense that is incorrectly classified may affect how income and expenses are represented in the accounting records.
If you use Xero or MYOB, reviewing imported transactions and checking that they have been correctly matched and reconciled can help identify these problems.
Some transactions are easy to overlook because they happen automatically or appear separately on the bank statement.
Bank fees may be deducted automatically from your account without being entered into your accounting software.
Recording these transactions helps your accounts reflect the actual movement of money.
Interest or other credits can appear on your bank statement before they are recorded in your accounting system.
Leaving these transactions unreconciled can create a difference between the two balances.
Subscriptions, software payments, loan repayments and other regular direct debits can leave the bank account automatically.
If these transactions are not recorded or matched correctly, the accounting balance may not agree with the bank statement.
Transfers between business bank accounts need to be recorded correctly.
An incorrectly recorded transfer can make one account appear higher and another lower than it should be.
Accurate accounting records are not only useful for understanding your business cash flow. They can also provide important information when preparing your tax return.
Business records need to contain enough information to support the income reported and deductions claimed in the relevant tax return. Bank statements can form part of business records, but additional documents such as invoices, receipts and other supporting records may be required depending on the transaction.
This means that reconciling your bank account is only one part of maintaining reliable tax records.
If transactions are missing, duplicated or incorrectly classified, it may become harder to determine the correct figures for your tax return.
A sole trader reports business income and expenses in their individual tax return rather than lodging a separate business tax return.
Accurate records can therefore help when preparing a Sole Trader Tax Return and reviewing business income and deductible expenses.
If your accounting records are incomplete or contain unexplained differences, reviewing them before lodging your individual tax return can help identify potential issues.
Partnerships have specific tax reporting requirements, and accurate records can help establish the partnership’s income, expenses and relevant partner information.
Keeping financial records organised can make the preparation of a Partnership Tax Return more straightforward and provide supporting information for the tax reporting process.
Companies have separate tax obligations from their owners.
Maintaining accurate financial records throughout the year can make it easier to review the information needed for a Company Tax Return and ensure the relevant financial information is available for lodgement.
Not necessarily.
A bank statement can help show that a payment occurred, but it may not contain all the information required to substantiate a deduction.
For many expenses, you may also need supporting documentation such as a receipt or invoice showing relevant details of the purchase. The ATO requires records to support deductions, and the specific evidence required can depend on the nature of the expense.
This is why keeping your bank transactions reconciled and your supporting documents organised is important when preparing a tax return.
The exact record-keeping requirements can depend on the type of expense and your circumstances.
If your bank balance does not match your accounting software, start by identifying the exact difference instead of simply making an adjustment to force the balances to agree.
First, compare the accounting software balance with the bank statement for the same date.
Note the exact amount of the difference. This can help narrow down the transactions that need to be reviewed.
Review deposits, payments, transfers, fees and other transactions within the relevant period.
Look specifically for:
If the difference continues from one period to another, an earlier reconciliation may contain the original error.
Checking previous periods can help identify when the balance first stopped matching.
Once the source of the difference has been identified, correct the underlying transaction.
Avoid simply entering an adjustment to make the balances appear equal when the actual cause has not been identified.
Keeping financial records accurate can help Australian businesses maintain reliable information for tax and financial purposes.
Regular reconciliation provides a clearer picture of actual cash movements, income and expenses.
Accurate records can make it easier to review the information required for a Business Tax Return and identify transactions that need further documentation.
When transactions are properly recorded and supporting documents are available, it can be easier to review whether business expenses meet the relevant requirements for a deduction.
The ATO requires businesses to maintain records that explain relevant transactions and contain sufficient information about their purpose and tax relevance.
If your business is registered for GST, accurate transaction records can also help when reviewing the information used for BAS reporting.
Accurate records can help business owners understand cash flow, income and expenses and make informed financial decisions.
The exact records you need depend on your circumstances and the type of transaction, but business records can include bank statements, invoices, receipts, tax invoices and other documents supporting income and expenses.
The ATO states that business records need to contain enough information to determine the essential features and purpose of relevant transactions and their connection to business income and expenses.
It is also important to keep business and personal transactions appropriately separated and maintain records that explain business transactions.
Keeping these records organised can make it easier to provide the information required when preparing your tax return.
If your accounting records contain unexplained differences, it may be worth having them reviewed before lodging your tax return.
This can be particularly relevant when:
Professional Tax Return Advice can help you understand what information is relevant to your circumstances and what records should be reviewed before lodgement.
Depending on your business structure, you may need specialised tax support for a sole trader, partnership or company, with the appropriate tax return prepared according to your business structure and obligations.
Tax time can be easier when your financial records have been kept accurately throughout the year.
Before lodging your tax return, review your business income, expenses, bank transactions and supporting documents. Make sure unexplained differences have been investigated rather than simply carried forward from one accounting period to another.
Accurate records can provide your tax agent with a more reliable foundation when preparing your Income Tax Return and reviewing eligible deductions.
If you are unsure about your records or tax obligations, obtaining Tax Return Advice before lodgement may help you understand what information is required for your circumstances.
Also read: Tax Refund Still Not Received? Reasons & Solutions
A difference between your bank balance and accounting software does not necessarily mean that money is missing. Timing differences, missing entries, duplicate transactions, incorrect amounts and unreconciled transactions can all create discrepancies.
However, persistent or unexplained differences should not simply be ignored. Reviewing your accounting records regularly can help identify problems before they affect your tax records, BAS information or tax return preparation.
For Australian business owners, accurate record keeping is an important part of staying organised for tax time. Whether you operate as a sole trader, partnership or company, keeping your financial information accurate and supported by appropriate records can make the tax return process easier.
If you need help understanding your tax records or preparing your return, professional Tax Return Advice can help you determine what information is relevant to your circumstances. You can also Contact Us to discuss your tax return requirements and get guidance based on your situation.
A bank statement can help confirm that a payment was made, but it may not always provide enough information to substantiate a business expense. Depending on the expense, you may also need an invoice, receipt or other supporting documentation that explains the nature and business purpose of the transaction.
Australian businesses generally need to retain relevant tax and business records for at least five years. Some records may have different retention requirements depending on the transaction or tax matter, so keeping important records securely and in an accessible format is recommended.
A genuine business expense may still be claimable when it has been paid from a personal account, provided it meets the relevant deduction requirements and is properly supported. The transaction should also be clearly identified as a business expense in your records.
Electronic accounting records can generally be used instead of paper records when they contain the required information and can be accessed when needed. Businesses should ensure their digital records remain accurate, readable and backed by appropriate supporting documentation.
If a receipt is unavailable, check whether you have other documentation that can establish the details of the transaction. Depending on the circumstances, records such as invoices, bank records or other evidence may help support the expense. The evidence required can vary depending on the type of expense.
Yes. Incomplete or inaccurate bookkeeping can make it difficult to determine the correct business income and expenses for tax reporting. Maintaining clear, complete records throughout the year can provide a more reliable basis for preparing your business tax return.