Small business owners often view cash as “the account” to reconcile. While cash is a critical item, that is not the only reconciliation to be done. Best practice is to reconcile all Balance Sheet accounts on a monthly basis and subsequently close the period once final. It is helpful to maintain a checklist of accounts to reconcile, with columns for each month. The reconciler should date and initial next to each reconciliation on the checklist. See our checklist template for reference.
1. Confirm all data for the period is entered, which includes vendor invoices, customer bills, and cash.
2. Communicate to the accounting system users that the period will be “soft closed”; meaning no further entries into the period should be made unless there are corrections. Any changes must be communicated to the person reconciling before the change is entered. This control helps maintain the integrity of the data reconciled.
3. Complete the cash account(s) reconciliation. A separate reconciliation for each cash account should be completed and filed with a copy of the bank statement. This reconciliation can either be done manually in a spreadsheet or completed through your accounting system if that feature is available.
4. Complete non-cash Balance Sheet reconciliations.
a. This may require research, follow-up, and/or journal entries.
b. Enter debits as positive values and credits as negative values.
i. Some accounting or ERP systems will not reflect this. It is OK to use positive values to reflect an increase in the account and negative values to reflect a decrease; the main objective is to be consistent and aware of the methodology.
c. A variance between the reconciliation and the template is an immediate red flag that further action needs to be taken, but it does not end there.
d. Reconciliations should make sense and be logically formatted so that the current period and ending balances are correct. If there is $150 prepaid in October and $100 is for the November period, the balance for that prepaid item at the end of November close should be $50. The line item balances and total account balance should make sense. Otherwise, it’s no more useful than a general ledger report from the system, which is used to create the reconciliation. Include notes, descriptions, expense account, and period of coverage as applicable.
e. Some accounts may require monthly journal entries, such as the following:
i. Prepaid Expenses: An expense paid in advance of the coverage or performance period. This may span a one month or a multiple year timeframe. The expense, on an accrual basis, should be recognized in the periods applicable until depleted.
2. Various Insurances
3. Maintenance Licenses
4. Subscriptions, Dues, & Fees
5. Retainers applied to future periods
ii. Deferred Revenues
1. When you have submitted and posted a customer bill for future period(s), the revenue will need to be recognized in the period earned regardless of when it was billed or received. This will create a deferred revenue balance which depletes as revenue is recognized over the future periods applicable.
iii. Accrued Expenses
1. When expenses are normally incurred but not booked, an accrual should be made via journal entry. Perhaps the vendor is late on submitting their invoice to your company. Since the expense was incurred, it should be booked even though you haven’t received the invoice yet.
iv. Accrued Incentives
2. Paid Time Off/Sick/Vacation
1. GAAP depreciation goes on the books.
5. What about the Income Statement?
a. Net Income or Loss is rolled into Retained Earnings on the Balance Sheet.
b. Trend expense should be analyzed. This will assist in determining if expenses should be accrued. Reference item 4-e.iii above.
c. Revenue should be reviewed and adjusted alongside any Deferred Revenue and Unbilled Receivables, which are Balance Sheet reconciliations.
Are you ready to reconcile?