Why is account reconciliation so important? In accounting, there will be errors. Reconciling your accounts is one of the best ways to catch errors and to fix them.
Account Reconciliation Frequency
Usually, the sooner you catch an error, the easier it is to fix, which leads us to another important aspect of practical bookkeeping. It is important to perform your bookkeeping activities on a regular basis, where the frequency depends upon the activity. For example, records 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.
Account Reconciliation Requirements
Your accounting software should provide a means to reconcile accounts. This process requires certain inputs. First, you need the month-end balance for the account, which is usually available from the monthly statement. Next, you need the individual transactions, which usually synchronize with QuickBooks via a bank or credit card connection or feed. The reconcile function of the accounting software helps to select the individual transactions for the month that add up to the month-end balance. If there is a difference, then you must find the imbalance.
Asset and Liability Accounts
You reconcile asset and liability accounts, including bank accounts, credit cards, and loan accounts. Your accounting software should provide a means to reconcile asset and liability accounts. What do you need to reconcile? You need 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.
Accounts Receivable, Accounts Payable, Undeposited Funds, and Clearing Accounts
In addition to reconciling bank, credit card, and loan accounts, it is important to reconcile 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. You may use the reporting functions to generate a balance sheet or a transaction report for an account register.
Reverse Old, Uncleared Transactions
The reconciliation process excludes transactions that do not clear from your bank or credit card account during the period. If the transactions are valid, they may clear during the next period. Otherwise, when transactions do not clear, they become old. If you find an old, unreconciled transaction that is no longer valid, then it is important to reverse the transaction in the current period. This action clears the transaction from your books. Please note that old, uncleared transactions should not be deleted, so as to not impact results for previous financial periods, which may have been reported to management, investors, or the Internal Revenue Service.
Account Reconciliation Roles & Responsibilities
In the context of the Client/Bookkeeper relationship, account reconciliation is the responsibility of the Bookkeeper, as communicated in the following overview diagram for cloud-based bookkeeping roles & responsibilities. Depending upon your staffing strategy, the office manager and bookkeeper roles may be delegated to one or more employees. Alternatively, you may decide to outsource the bookkeeper role.
Account Reconciliation Concept of Operations
Now consider a concept of operations for account reconciliation using QuickBooks Online. Once a week, your bookkeeper publishes financial documents (bills, receipts, & invoices) to QuickBooks from the records management system. When the end of the month arrives, your bookkeeper downloads a monthly statement for the bank, credit card, and loan accounts. When using the ‘Reconcile’ function of QuickBooks, your bookkeeper enters the end of the month balance and date for each account, and QuickBooks selects transactions that have cleared in the account registers and that add up to the month-end balance.
In Case of an Imbalance
In case of an imbalance, your bookkeeper compares each transaction on the monthly statement with each transaction in QuickBooks, in chronological order, until the discrepancy is identified. Common discrepancies include duplicate transactions or missing transactions. When found, your bookkeeper should remove duplicate transactions and add missing transactions, in order to fix the imbalance. Once you have fixed the imbalance, and all bank, credit card, and loan accounts are reconciled, then your bookkeeper proceeds to reconcile your accounts receivable and accounts payable.
Leverage QuickBooks Reports & Account Registers
Your bookkeeper may 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 your bookkeeper compares the month-end balance for each with the corresponding line item in the balance sheet as of the last day of the month. Finally, your bookkeeper reconciles 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, your bookkeeper may have other accounts to reconcile, e.g., petty cash, or an inter-company loan.
In Case of Old, Uncleared Transactions
Finally, your bookkeeper uses the reporting function of QuickBooks to run a ‘Transaction Detail by Account’ report, to check for old, uncleared transactions. Your bookkeeper selects last month for the report period. To search for old, uncleared bank transactions, your bookkeeper selects the ‘Distribution Account’ and ‘Cleared’ filters and selects the ‘All Bank Accounts’ and ‘Uncleared’ options from the corresponding dropdown menus. To search for old, uncleared credit card transactions, your bookkeeper selects the ‘All Credit Card Accounts’ dropdown option, instead of the ‘All Bank Accounts’ dropdown option. When old, uncleared transactions exist in your accounts, then your office manager should follow up with vendors and/or customers to check the status. If a transaction is no longer valid, then your bookkeeper reverses the transaction in the current month, in order to maintain the integrity of previous financial reporting periods.
Account Reconciliation Workflow
The Account Reconciliation Workflow may be decomposed into the following parts: Before-You-Reconcile and Reconcile Accounts. Each part is performed in sequence at the end of each month. You may choose to manage these workflows by entering them into a cloud-based workflow application. The one I use is 17hats.
|1||Clear the QBO Feeds for the Period – The QBO feeds are cleared for the period.|
|2||Clear the Uncategorized Transaction accounts – Investigate and categorize transactions that are categorized to ‘Ask My Accountant’ and ‘Uncategorized Transaction’.|
|3||Create Journal Entry to Transfer Owner Personal Funds – Transfer Owner Funds used for business expenses to Owner Contributions.|
|4||Create Journal Entry to Transfer Prepaid Insurance – Transfer Prepaid Insurance for the period to liability and/or expense accounts.|
|5||Create Journal Entry to Transfer Prepaid Expenses – Transfer Prepaid Expenses for the period from assets to expenses.|
|6||Confirm Zero Balance for Payroll Liability Accounts – Confirm payroll liability accounts have a zero balance.|
|7||Confirm Undeposited Funds are Current – In the QuickBooks chart of accounts, select View Register, and confirm the balance is zero or that undeposited funds are current.|
|8||Confirm Accounts Receivable are Valid – Confirm accounts receivable are collectible.|
|9||Confirm Receipts attached for Long-term Assets – Run a Transaction Detail by Account report in QuickBooks, and filter for Fixed Assets and Other Asset accounts. Check that each long-term asset purchase has a matching receipt attached.|
|10||Download Bank, Credit Card, and Loan Statements – Download and save statements that are needed to reconcile.|
|11||Schedule Reconcile Workflow – When the Pre-reconcile Workflow is complete, schedule the Reconcile Workflow.|
Reconcile Accounts Workflow
|1||Reconcile Bank Accounts – Use the QuickBooks reconcile function to reconcile each bank account with the month-end balance reported in the bank statement for the period Select or deselect transactions until the difference is zero.|
|2||Reconcile Petty Cash – Use the QuickBooks reconcile function to reconcile petty cash with the balance in petty cash at the end of the period.|
|3||Reconcile Clearing Accounts – Use the QuickBooks reconcile function to reconcile each clearing account with a zero balance.|
|4||Reconcile Accounts Receivable (A/R) – Reconcile A/R Aging Detail report with the balance of A/R on the balance sheet.|
|5||Reconcile Accounts Payable (A/P) – Reconcile A/P Aging Detail report with the balance of A/P on the balance sheet.|
|6||Reconcile Credit Card Accounts – Use the QuickBooks reconcile function to reconcile each credit card account with the month-end balance reported in the credit card statement for the period Select or deselect transactions until the difference is zero.|
|7||Reconcile Loan Accounts – Use the QuickBooks reconcile function to reconcile each loan account with the month-end balance reported in the loan statement (or amortization schedule) for the period.|
|8||Schedule Report Workflow – When the Reconcile Workflow is complete, the Report Workflow is scheduled.|
To learn more about the applications referenced in this post, please click the following external links:
- Accounting Software, QuickBooks Online (QBO): https://quickbooks.intuit.com/
- All-in-One Small Business Management Platform, 17hats: https://www.17hats.com
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