My past two blogs focused on how to approach an initial accounting review and clean-up.  After updating the Chart of Accounts and scrubbing the Vendor and Customer lists, it’s time to reconcile accounts.  Account reconciliations will ensure consistency and accuracy in your financial reporting.  Reconciling accounts also provides a trustworthy starting point for all future accounting activities.

Account reconciliations are performed at the end of an accounting period as a way to ensure that financial statement account balances are correct.  Typically, the process compares two sets of records to ensure figures “foot.”  Accounting balances may be compared to bank statements, credit card statements, or other external data sources.  If the two records are not in agreement, explanations and/or adjustments are necessary.

The following are examples of critical accounts that require reconciliation:

  • Cash, Bank, and Investment Accounts:   With bank feeds, phone apps and other integrations, I less frequently encounter small businesses with unreconciled checking accounts.  Managing limited cash reserves requires accurate and up-to-date balance information.  That said, many businesses fail to reconcile petty cash, and savings accounts. 
  • Accounts Receivable:  Unreconciled receivables are common.  These include receivables that linger on the books for years, with inadequate customer follow-up and/or collection attempts.  There is no write-off policy.  Also common are orphaned customer credits.  I once had a B2B customer that charged customers based on estimated shipping costs.  When actual shipping costs proved to be less than charged, it did not refund the money; instead, it created credits.  If customers did not reorder, the credits remained . . . forever.
  • Prepaid Expenses:  Prepaid Expense accounts have a tendency to become roach motels: “Guests check in, but they don’t check out.”  Entries for prepaid insurance, for instance, are booked but never amortized.  
     
  • Accounts Payable:  Accounts Payable are more self-policing than Accounts Receivable.  Vendors chase unpaid bills.  Nonetheless, an in-depth AP reconciliation can catch discrepancies in billing, receiving and account defaults, to name a few. 

  • Credit Cards:  The most common problem I see when reconciling credit cards is that of perpetual subscriptions.  Monthly subscription fees for programs that are no longer used, or that have far more user licenses than needed.  These can add up.  Also noteworthy are problems associated with the mixing of personal and business expenses.
     
  • Inventory, Fixed Assets:  I lump inventory and fixed assets together here because these are often managed by separate apps or extensions, outside of a company’s base accounting program.  Fishbowl, Unleashed, Zoho, InFlow, SkuVault and other inventory management apps offer many features that QuickBooks, Sage and other programs do not.  That’s great, as long as users understand that most of these integrations are one-way.  Inventory transactions flow from the inventory management app to the accounting program, but not visa versa.  I had one customer who did not understand this and booked transactions in Fishbowl and, sometimes, directly in QuickBooks.  Unreconciled, a $300,000 discrepancy developed over a two year period. 

There are other accounts that should be reconciled at least once a year, including intercompany payables and receivables, capital leases and bank loans, equity (paid in capital), and intangible assets.  These and all other account reconciliations are especially important and are a key internal control for companies that need to report financial results to external stakeholders

One last point.  Many managers assume that all necessary account reconciliations will be performed by their external accountants at tax time.  They may well be, depending on the scope of work/engagement letter and the professionalism of the accountants.  Then again, many reconciliations may not be performed.  Most accountants are overwhelmed with business during the first four months of the year; they depend on management provided information.  When that information is missing or partial, or when only a compilation is requested, accounts can go unreconciled. 

Don’t assume your accounts are in order.  WWLC can help you with your accounting clean-up tasks. We can help you establish a sound basis for your financial reporting. 

 

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