How to Reconcile Bank Transactions in FreshBooks

Keeping your financial records accurate is the foundation of a healthy business, and bank reconciliation is a non-negotiable part of that process. Regularly comparing your bank statements to the transactions recorded in your accounting software ensures everything matches up, catching errors before they snowball. This article provides a comprehensive guide on how to perform a bank reconciliation in FreshBooks, from connecting your bank account to troubleshooting common discrepancies and adopting best practices.

Why Bank Reconciliation in FreshBooks Matters

Before diving into the "how," it’s important to understand the "why." Bank reconciliation is more than just an administrative chore; it's a critical financial health check. A consistent reconciliation habit provides several key benefits.

• Error Detection: You can quickly spot errors made either by you or the bank. This could be a duplicate charge, a missed deposit, or an incorrect transaction amount that could otherwise go unnoticed.
• Accurate Financial Reporting: Your Profit & Loss statement and Balance Sheet are only as reliable as the data they are built on. Reconciliation confirms that the cash balance in your books is correct, making your financial reports trustworthy for stakeholders, lenders, and investors.
• Enhanced Cash Flow Management: Reconciliation gives you a true picture of your cash position. You’ll know exactly how much money is available after accounting for uncleared checks and recent deposits, allowing for better-informed decisions about spending and budgeting.
• Fraud Prevention: Scrutinizing every transaction that hits your bank account is a powerful way to detect unauthorized charges or suspicious activity early.
• Tax Time Readiness: When it comes to tax season, reconciled books mean your income and expense data is clean, complete, and ready for your accountant. This prevents last-minute scrambling and potential inaccuracies on your tax return.

Setting the Stage: Connecting Your Bank Account

You can't reconcile your bank transactions without first bringing them into your accounting software. The first step is to connect your business bank and credit card accounts to FreshBooks. This feature automatically imports your transactions, saving you countless hours of manual data entry and creating the foundation for the reconciliation process.

Here’s how to set up the connection:

1. Log in to your FreshBooks account.
2. From the left-hand navigation menu, click on the "Banking" tab. This is where all your transaction management takes place.
3. In the upper right corner, click the blue "Connect My Bank" button.
4. FreshBooks uses a secure third-party service called Plaid to connect with thousands of financial institutions. A new window will pop up where you can search for your bank by name.
5. Select your bank from the list and enter the same login credentials you use for your online banking portal.
6. Choose which accounts (e.g., checking, savings, credit cards) you want to connect to FreshBooks.
7. Once authenticated, FreshBooks will begin pulling in your recent transaction history, usually from the last 90 days. Ongoing transactions will then be imported automatically every day.

With your account connected, you'll see a feed of your banking transactions that are waiting to be categorized and matched to your bookkeeping records.

The Core Reconciliation Process in FreshBooks: A Step-by-Step Guide

Once your transactions are flowing into FreshBooks, you can perform the actual reconciliation. It’s best practice to do this monthly, as soon as your bank statement for the period is available. Have your official bank statement (either a paper copy or a PDF) open and ready.

Step 1: Navigate to the Bank Reconciliation Tool

In the main navigation menu on the left side, go to the "Accounting" section. A sub-menu will appear; click on "Bank Reconciliation." This is your command center for the entire process.

Step 2: Select the Account and Define the Period

On the Bank Reconciliation screen, you'll first be prompted to select a few key details:

• Account: Choose the specific bank or credit card account you want to reconcile from the dropdown menu.
• Statement End Date: Enter the last day of the period you are reconciling, which should match the end date on your bank statement (e.g., if you're reconciling for January, you would enter January 31).

Step 3: Enter the Statement Ending Balance

This is arguably the most critical step. Look at your official bank statement and find the "Ending Balance" or "Closing Balance." Enter this exact figure into the "Statement End Balance" field in FreshBooks. This balance is your target; the goal is to make your FreshBooks transactions match this number precisely.

After entering the balance and date, click "Go." FreshBooks will now present the main reconciliation screen.

Step 4: Review and Match Transactions

The reconciliation screen in FreshBooks is typically split into two main sections: payments (money out) and deposits (money in). FreshBooks automatically checks off items that it has matched between your bank data and your bookkeeping entries (like invoice payments or logged expenses).

Your job is to go through the list and confirm these matches are correct, as well as manually match any items FreshBooks might have missed. As you check off items, you will see the “Reconciliation Summary” on the right-hand side update in real-time. It shows:

• Statement End Balance: The target figure you entered.
• Book Balance: The calculated balance based on all the transactions you've selected in FreshBooks.
• Difference: The key metric. Your objective is to make this number $0.00.

Handling Common Reconciliation Challenges

It's rare for a reconciliation to be perfect on the first try, especially if you have a high transaction volume. Don’t panic if your "Difference" isn’t zero yet. Here’s how to troubleshoot the most common issues directly from the reconciliation screen.

Bank-Only Transactions (Fees, Interest, etc.)

Your bank statement often includes items that you haven't recorded in FreshBooks yet, like monthly service fees, interest earned, or merchant processing fees.

• The Problem: A transaction exists at the bank, but not in your books. For example, a $15 bank service fee.
• The Solution: FreshBooks allows you to add these directly. On the "Bank Imports" tab (or similar section), find the bank transaction not in your books. Click it, and select "create a new expense" or "transfer." For a bank fee, you'll create a new expense, categorize it as a "Service Charge," and give it a proper description. The newly created transaction will then be available to match in the reconciliation.

Issued but Unpaid Checks

You may have written checks that haven't been cashed or deposited yet. These will appear as outstanding expenses on your books but aren’t on your bank statement.

• The Solution: Note these issued checks and ensure they’re categorized correctly in FreshBooks. This accounts for the difference between your book balance and bank statement. Keep these items marked as "outstanding" until they clear.

Duplicates

The Problem: You may accidentally import a transaction twice, resulting in a discrepancy.

• The Solution: Delete any duplicate transactions that were erroneously imported. This will ensure that every transaction only appears once per reconciliation period.

Final Thoughts

Bank reconciliation might seem tedious, but it’s critical in ensuring accurate financial management. Regular reconciliations help you maintain an up-to-date understanding of your company’s finances, safeguard against fraud, and ensure smooth operations. With a proper system like FreshBooks, the process becomes more streamlined, allowing you to focus on what matters most—running and growing your business.