One of the most important accounting functions is that of reconciling, or tying out each number on the financial statements to supporting documentation. Reconciliations provide a level of internal control, and substantiate the figures on the company’s financial statements. Unreconciled balances cannot be relied upon by either management or outside sources.
So which accounts should be reconciled? Every one that appears on your balance sheet, and some of them that appear on the P&L.
Every checking, saving and investment account, for example, should be reconciled at least monthly to the statement received from the bank or investment company. Ideally this should be done by someone with no cash-handling or check-writing authorization. At a minimum, the owner should review the bank statements and cancelled checks. If these accounts are not reconciled and uncleared items resolved, other accounts (including sales, receivables, payables, etc.) likely will be misstated and theft may occur undetected. Over- or under-stated accounts also can result in management making decisions based on incorrect data. Because the checking accounts affect so many other accounts, the importance of reconciling these accounts cannot be overstated.
Receivables accounts including pre-payments should be reconciled to management system reports monthly to ensure that both systems are accurately reporting the same results. Any write-offs of uncollectible accounts should be approved by the owner or general manager; having that same person make one last collection attempt can potentially confirm if the payment was already received (and thus was either misapplied or misappropriated). Write-offs should be done as soon as it is determined that the account is uncollectible so that receivables are not overstated for long.
Work-in-process accounts should be tied out to management system report totals monthly, while inventory balances should be compared to physical counts of paint materials and stock parts at least annually.
Fixed asset account totals should match a current list of assets that can be visually confirmed. Depreciation totals should also be reported on this list. If the list includes assets that have been disposed of previously, notify your CPA so that the disposition can be accurately recorded.
Intangible asset and deposit accounts should be reviewed periodically to ensure that nothing has mistakenly been posted to the accounts and that amounts can still be tracked back to original documentation.
For companies managing their own payroll, reconciling the payroll liability accounts monthly ensures that amounts withheld from employee paychecks are getting remitted correctly. Any negative balances in a payroll liability account could indicate an over-remittance or misposting. For companies that use a payroll clearing account, it is imperative that the account be zeroed out each pay period; carried-over balances in these accounts typically indicate a misposted item somewhere.
Reconciling the sales tax account (if you operate in a state with sales tax) ensures that the amounts collected are accounted for and remitted. Sales tax discrepancies can arise from wrong rates or from taxing items incorrectly, and these discrepancies should be identified prior to finalizing the sales tax return.
Payables balances should be tied out to vendor statements monthly. Any discrepancies should be corrected before the financial statements are finalized for the period.
Credit card balances and loan balances on the financial statements also should be compared to credit card and loan statements on a monthly basis. Not tying these balances out can result in misstated loan balances and interest or other expenses.
For companies operating multiple shops or related companies, due to/due from accounts are used frequently and it is important that the balance on one company’s books (“Due From/Asset”) equals the balance on the other company’s books (“Due To/Liability”). Reconcile this monthly. Frequently the entry gets made on one set of books but not on the other.
Finally, for companies with multiple owners, the shareholder loan and capital accounts should be reviewed periodically to ensure correct ownership values are maintained.
Reconciling every account on the balance sheet ensures the reliability of the data. Although some CPAs may be performing these reconciling functions, do not assume this is so. These are your company’s financial statements and it is up to you to ensure that the numbers you are using are as timely and accurate as possible.
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