How are electronic payment items — EFT payments and standing orders — treated in a bank reconciliation?

What makes an EFT or standing order different from a check?

Two kinds of outflow are covered here. An electronic funds transfer (EFT) is a payment the business starts itself: an ACH payment to a supplier, a bill paid through online banking, a tax payment made on a government portal. In the U.S. many of these run on the ACH network, which moves money electronically between banks and credit unions. A standing instruction works differently. The business authorizes it once, and after that the payee's debit or the bank's own schedule takes the money each period without anyone approving it again. Monthly debits for routine bills are one of the common uses of ACH: rent, software subscriptions, insurance premiums, loan payments.

For the reconciliation, what matters is the thing that is missing. A written check leaves a stub, a register line and a numbered instrument that has to come back through the bank. An electronic item leaves none of these. Unless someone deliberately makes an entry when the payment is authorized, the money can leave the account with nothing happening in the books at that moment. So the first question for every electronic debit on the statement is "do the books already carry this?", not "what kind of payment is this?"

Which side of the reconciliation does the item adjust?

A bank statement balance and the book balance differ for a known set of reasons. Every reconciling item belongs on one side or the other. An electronic payment can land on either side, depending on your own recording practice.

Recorded first, then settled. Say you entered the payment when you authorized it, for example when you scheduled a supplier's ACH payment in online banking. Your cash account already shows the reduction. If the bank has not settled the payment by the statement date, it behaves exactly like an outstanding check: a payment already deducted in your records that the bank has not yet processed. List it as a deduction from the bank statement balance. It needs no journal entry, because the books are already right. Confirm on the next statement that it cleared for the same amount.

First seen on the statement. Say the statement shows a debit your books have never recorded, which is typical of a standing order nobody entered or a payee-initiated debit. Take the bank's figure as the amount to record once you have traced the debit to an arrangement. Record the payment in the books now: a transaction the bank knows about but the books do not must be journalized in the business's records. The entry reduces the book balance, so the item shows as a deduction on the book side, backed by a journal entry.

How do you tell what the payment discharged?

Before you post anything for an item first seen on the statement, find out what it paid. The description a bank prints for an electronic debit is that bank's own convention and differs by institution, so do not rely on it alone. Check your open payables, your contracts and your list of standing instructions. An explained payment will be one of four things.

An obligation already on the books. If a bill from this payee is sitting in accounts payable, the payment settles that bill. Debit accounts payable, not an expense account. The expense was recorded when the bill was entered.

A recurring cost with no prior entry. If nothing was recorded, which is common for subscriptions and utilities paid by debit without a bill being entered, the payment is itself the first record of the cost. Debit the expense.

A financing payment. A loan or equipment-finance debit pays down a liability and pays interest in one amount. A later section covers it.

A movement between your own accounts. A debit that funds another account the business owns is neither an expense nor a payable. Record it as a transfer so that the receiving account reconciles too. The separate question on recording transfers between your own bank accounts covers the entry.

A debit that traces to nothing, or whose amount differs from what was instructed, may be a bank error or a debit nobody authorized. Treat it as a query to the bank or the payee, not an entry, and leave it as an open reconciling item until it is explained or reversed.

The mistake to avoid is posting a fresh expense for a payment that settled a bill already in payables. When that happens, the cost is counted twice and the bill stays open, so the supplier still looks unpaid. Charges the bank levies on an electronic payment are a separate item with their own treatment. Keep them out of the payment's entry.

What if the payment was initiated before the cut-off and settled after it?

Electronic payments do not always settle on the day they are entered. ACH payments can clear the same day when entered on a business day during business hours, but a payment is not necessarily completed on the day you enter it, and settlement can take days. So an electronic payment has two dates: the day the business initiated it and the day the bank settled it. The date a bank prints for an electronic debit is that bank's own convention and differs by institution, so check on your own statement which date it shows.

Take a supplier payment initiated on June 30 that settles on July 2. If you recorded it on June 30, the June reconciliation shows it as a deduction from the bank balance, just like an outstanding check. It drops off in July when it appears on the statement. If you did not record it, the June statement will not show it either, and it enters the books when it appears in July.

Which period bears the cost is a separate question, and the statement date does not answer it. Under an accrual method, a business expense is generally deducted or capitalized in the tax year in which the all-events test is met and economic performance has occurred, not when the cash moves. For a bill already in payables, the expense is already in the right period, and the payment date only affects cash and payables. Under the cash method, expenses generally fall in the year you actually pay them. An expense paid in advance, such as an insurance premium covering a later period, is deductible only in the year to which it applies unless it qualifies for the 12-month rule, so raise those with the preparer as well. For a cash-method business, decide with whoever prepares the tax return whether an electronic payment made across a year-end counts as paid on the initiation date or the settlement date, and then apply that date the same way every time. Using whichever date the statement happens to show moves costs back and forth across the cut-off, which is exactly where the reconciliation needs to be reliable.

The same logic applies when the bank executes a standing instruction on a date the books did not expect. If the scheduled entry is already posted and the debit settles after the statement date, it is a bank-side timing item. If the bank debited the account before the scheduled entry posted, it is a book-side item for that period. Move the entry to the date your attribution convention gives for the payment, not the amount.

How do you record a recurring instruction ahead of time?

A standing instruction that stays unrecorded shows up as a new reconciling item every month and gets posted from the statement every time. The reconciliation then never tests it, and a price increase slips through among items that are always "unrecorded."

The fix is to record each recurring instruction in advance as a scheduled or repeating entry, so the entry is already in the books when the bank executes it. Zoho Books, for example, on its Professional, Premium, Elite and Ultimate plans, calls these recurring journals: profiles set up to create manual journals automatically at regular intervals. Other platforms offer equivalent recurring-transaction features; check your own software's documentation. A manual monthly checklist entry does the same job. Then the debit on the statement matches something you expected, and it is either cleared or a timing item, not a discovery.

A scheduled entry is only safe to rely on if:

• Its amount is the instructed amount. For a fixed debit, set it once and update it whenever the payee notifies a change. For a variable debit, such as a utility or card-processor settlement, schedule a placeholder and correct it to the statement or the payee's bill each period. Never accept the placeholder unchecked.
• It is coded to what the payment discharges. If a bill is entered for the same charge, the scheduled item should be the payment of that bill, not a second expense.
• It has an owner and an end. Tie each template to the arrangement behind it, and stop the template when the arrangement ends.

How do you catch an instruction that should have stopped?

Scheduled entries create a blind spot. When a subscription is cancelled but the debit keeps running, both the template and the bank keep producing matching amounts, and the reconciliation balances. The same happens when an old lease payment continues after the lease ended. A clean reconciliation does not prove that every recurring debit is still owed.

The control is an explicit comparison, done at least quarterly and at every year-end:

1. Keep an inventory of the live standing instructions: payee, amount, frequency, the account debited, and the contract or agreement behind each one, with its end date. If you have no such list, build it first from twelve months of statement debits.
2. Compare three things: the inventory, the recurring templates in your books, and the debits actually on the statement. Every debit should trace to a live arrangement, and every template to an inventory line.
3. Report the differences in the reconciliation working papers, not just in the balances. That means a debit from a payee whose arrangement has ended, an amount that differs from the instructed amount, a template with no matching debit, or a debit with no template.

A debit that continues after its arrangement ended should not be quietly expensed. Show it as an exception, with the amount taken since the end date, so someone can pursue a refund from the payee and stop the instruction. Stopping a template in your books does nothing to the instruction at the bank. The instruction has to be cancelled with the bank or the payee.

What changes for loan payments and bank feeds?

Financing payments. A loan or equipment-finance debit arrives as one number that combines principal and interest. It cannot be recorded as a single expense without overstating interest and leaving the loan balance too high. The split does not come from the statement. Take it from the lender's own amortization schedule or statement before you record the payment or build the scheduled entry. The related question on splitting a loan payment covers where to get the split and how to post it.

Automated bank feeds. If a feed imports statement activity into your books, the electronic debit may already be there, categorized provisionally or matched to something. Do not assume that a matched or categorized item is correctly recorded. Check what it was coded to against what it actually discharged. The most common error is an expense category on a payment that should have cleared a payable, and the totals will still agree. Matching feed items and setting categorization rules are covered in their own questions.

Where do these items sit in the finished reconciliation?

Here is a June reconciliation for an operating account. It has one recorded supplier payment that the bank settled on July 2, and one standing-order debit for a subscription that the books first saw on the statement. Prepared correctly, both balances come to the same amount:

The bank-side deduction needs no entry. The book-side deduction is supported by the subscription entry above, and once that is posted the ledger's cash balance is 17,150.00. Next month, the scheduled entry for the subscription should mean it no longer appears as a reconciling item at all.