Reconcile: Measure What You Manage
Account reconciliations should be part of your month end process. Reconciling your accounts is important to ensuring your company’s financial integrity and the accuracy of your bookkeeping. It enables you to have accurate numbers for your balance sheet.
I believe account reconciliation is one of the most important things a bookkeeper does. Data entry is usually a pretty simple matter of making judgments on what accounts to assign transactions to. Reconciling your accounts is where the rubber meets the road. In fact, if you haven’t reconciled as part of your month end, you haven’t really done bookkeeping. You’ve just done data entry.
The monthly financial close should begin with account reconciliations. This creates a foundation for evaluating business performance and making important decisions for your company. So, what accounts should be reconciled?
- The Bank Account:
The benefits to reconciling your bank account is ensuring the accuracy of your bookkeeping, ensuring that the bank statement is accurate and also provides fraud detection. The bank balance should match what is currently in the software less any cheques that have not been cleared.
- Accounts Receivable:
Reconciling accounts receivable ensures that all customers have been invoiced and all payments have been processed. After ensuring each customer’s account is accurate, you will know what is outstanding and be able to do collections with confidence.
- Prepaid Accounts:
These are accounts that are used when you pay for an item (like insurance or property tax) that applies to the whole year. Each month, 1/12th should be expensed. Reconciling the prepaid accounts ensures this has happened.
At the end of the accounting period, a physical inventory should be taken. Those numbers can then be compared to the book balance and any needed adjustments can be made. How often should inventory be counted? You can do it periodically or in a cycle. I prefer inventory counts being done in a cycle because you are able to constantly ensure accurate numbers, and identify theft, fraud or errors in your inventory account. It ensures overall general accuracy of your inventory account.
- Credit Cards:
Reconciling your credit cards is basically the same as reconciling your bank account. The main difference is that a credit card is a payable. There is often a large amount of transactions on a company’s credit card statement. I like to enter all transactions on a spreadsheet, ensure there is backing documentation for each transaction, and code it to accounts. Then I can enter it as one transaction and also have my own documentation for any time receipts are missing and come in later. It’s easy for me to look at the specifics of how I entered credit card transactions for each month.
- Accounts Payable:
Reconciling vendor accounts is very important. I worked in accounts payable for a housing manufacturer for a number of years. There were a lot of vendor accounts. Reconciling vendor accounts to the monthly statement enabled me to be sure I had all the bills from each vendor, that I received any credits requested and that my balance for each vendor was correct.
It is very important to reconcile your loan accounts. Businesses who don’t do this will inevitably enter the whole payment against the loan rather than accurately assigning interest and any taxes. Eventually this will result in a negative loan balance. If the company you made the loan from doesn’t issue a monthly statement, when you make the loan and record it in your books, you should also create a spreadsheet to calculate the interest. Be sure you know what charges are included in each payment and include them in the spreadsheet so you can reference it for each payment.
When you have reconciled all the appropriate accounts, glance over the balance sheet account balances to spot any accounts that have strange balances, such as negative balances. Investigate it to ensure the account is accurate.
Reconciling accounts does take some extra time but in the end, you ensure the accuracy of your books. When you need to make an important decision, you will be glad you have accurate numbers that you can trust as the foundation for that decision. Reconciling balance sheet accounts is crucial to understanding and evaluating the financial position of your business.
YOU CAN’T MANAGE IT IF YOU DON’T MEASURE IT!