Why is it important to reconcile your accounts? In accounting, there will be errors. To err is human, and even computers make errors. Reconciling your accounts is one of the best ways to catch errors and to fix them. Usually, the sooner you catch an error, the easier it is to fix, which leads us to another important aspect of practical bookkeeping. That is, it is important to perform your bookkeeping activities on a regular basis, where the frequency depends upon the activity. For example, document management, accounts receivable, and accounts payable activities may be performed on a weekly basis, and account reconciliation and financial reporting may be performed monthly. By adhering to a regular schedule, you will catch issues early, and you will be able to resolve them quickly.
What do you reconcile? You reconcile certain asset and liability accounts, including bank accounts, credit cards, and loan accounts. When reconciling these accounts, you are comparing monthly transactions that have been entered into your accounting software with monthly statements that report individual transactions and a month-end balance. Your accounting software should provide a means to reconcile asset and liability accounts, given an ending balance and ending date from corresponding monthly statements. If each transaction is present in your accounting software, and the sum-total of these transactions equals the month-end balance in the monthly statement, then the account and the transactions are reconciled.
In addition to reconciling bank, credit card, and loan accounts, it is important to balance your accounts receivable, accounts payable, undeposited funds, and clearing accounts. For these accounts, there is not a monthly statement, so you must reconcile with your balance sheet or account register. When balancing accounts receivable and accounts payable, you reconcile with the corresponding line items in your balance sheet. And when you reconcile undeposited funds or a clearing account, you reconcile with the ending balance of the corresponding account register in QuickBooks. For a clearing account or an undeposited funds account, the ending balance should be zero (i.e., clear). The accounts receivable, accounts payable, undeposited funds, and clearing accounts may be reconciled by leveraging reporting functions of your accounting software to generate a balance sheet or a transaction report for an account register.
Each month, once your accounts are reconciled, then you should perform a check for old, uncleared transactions. These are financial transactions that have been entered into QuickBooks, but they have not cleared your account for a variety of reasons. For example, the financial transaction may have been cancelled, or a check may have been lost. If you find an old, unreconciled transaction that is no longer valid, then it is important to reverse the transaction in the current period, so as the clear the transaction from your books. Please note that old, uncleared transactions should not be deleted, to not impact results for previous financial periods, which may have been reported to management, investors, or the Internal Revenue Service.
Now consider a concept of operations for account reconciliation using QuickBooks Online. Once a week, you publish financial transactions to QuickBooks from your records management system, and you manage your accounts receivable and accounts payable, using Bill.com. When the end of the month arrives, you download a monthly statement for your bank, credit card, and loan accounts. Using the ‘Reconcile’ function of QuickBooks, you enter the end of the month balance and date for each account, and QuickBooks selects transactions that have cleared in your account registers, to reconcile the balance on your month-end statement with the QuickBooks balance.
In case of an imbalance, you compare each transaction on your monthly statement with each transaction in QuickBooks, in chronological order, until you find the discrepancy. You may find a transaction that was entered twice, or perhaps a transaction that was not entered at all. Once you have fixed the imbalance, and all bank, credit card, and loan accounts are reconciled, then you proceed to reconcile your accounts receivable and accounts payable. You determine the month-end balance for accounts receivable and accounts payable by running an A/R Aging Detail report and an A/P Aging Detail report, respectively, in QuickBooks. Then you compare the month-end balance for each with the corresponding line item in the balance sheet as of the last day of the month. Finally, you reconcile your undeposited funds and clearing accounts by confirming the month-end balance for each account register in QuickBooks is zero. Depending on the types of asset and liability accounts that you have, you may have other accounts to reconcile, e.g., petty cash, or an inter-company loan.
Finally, you use the reporting function of QuickBooks to run a ‘Transaction Detail by Account’ report, to check for old, uncleared transactions. You select last month for the report period. To search for old, uncleared bank transactions, you select the ‘Distribution Account’ and ‘Cleared’ filters, and you select the ‘All Bank Accounts’ and ‘Uncleared’ options from the corresponding dropdown menus. To search for old, uncleared credit card transactions, you select the ‘All Credit Card Accounts’ dropdown option, instead of the ‘All Bank Accounts’ dropdown option. If old, uncleared transactions are identified, you follow up with vendors and/or customers, to check the status. If a transaction is identified as no longer valid, then the transaction is reversed in the current month, to maintain the integrity of previous financial reporting periods.