Five Steps to Good Account Reconciliation Procedure

An important task for any finance department is account reconciliation.
Items recorded as assets and liabilities at some point usually get paid, collected, depreciated or disposed; however, the related accounting entry to remove these items from the balance sheet does not always get made.

For example, an operating department may dispose of a capital asset without notifying the finance department or a cash collection may have been recorded as a revenue instead of an offset to the receivable. Without regular account analyses, these types of errors can accumulate on the balance sheet causing both balance sheet accounts and revenues/expenses to be misstated by a significant amount. 

 

Here are the five most important steps to good account reconciliation procedure:

 

1. Timing - Determine which balance sheet accounts will be reconciled when – monthly, quarterly, or annually based on materiality, quantity of transactions, complexity, history of errors.
2. Assign a Reconciler - Assign each balance sheet account to an employee to reconcile. Provide the reconciler with appropriate training.
3. Format - Develop a standard format for each reconciliation. Although the format of each reconciliation will vary some depending on the types of assets and liabilities being reconciled, the reconciliation format should be as similar as possible. The format should include, at a minimum:
   • The list of detailed transactions
   • The GL (general ledger) balance
   • The reconciler’s name (the employee you assigned in step 2)
   • Date it was reconciled
   • Reviewer’s signature and date
   • A summary of the journal entries needed
     
     
4. Reconcile - The reconciler should ascertain that the transactions recorded in the general ledger are still properly classified as assets or liabilities. The reconciler will likely need to refer to supporting documentation such as debt agreements, developer agreements, investments purchase confirmations and custodial statements. Journal entries are made if necessary to correct the account balance. 
5. Document and File - The reconciliation should be maintained in a centralized location such as a shared drive. Supporting documents used in the reconciliation should also be maintained in the shared drive, to demonstrate the existence of the asset or liability. This documentation will be used for future reconciliations and can be a helpful source when researching the details of the related general ledger balances.  

How to Create Account Analysis Assignments

Click here to download an account analysis sample in Excel.

When creating account analysis assignments, it is important that every balance sheet account will be assigned to a reconciler (see step 2 above) and reconciled regularly, including fund balance accounts.
 
In this attached template to track reconciliation assignments and status, you can see that the balance sheet starts with a record of every balance sheet account (column F) and its related account balance (column G). The GL accounts are combined into categories as appropriate (e.g., all cash accounts are combined, all capital asset accounts are combined, all debt accounts are combined). Then you add following the columns that track who is assigned to reconcile the account (column I), date last reconciled (column J), and finally the date the reconciliation was reviewed (column K) and by whom (column L).

 

(Click the image above to download the account reconciliation assignment in Excel.)

If you follow these steps, you can keep your account reconciliation more accurate, more up to date, and more efficient for all departments involved.

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If you’d like a more detailed walk-through, or have any questions in setting up or fixing your account reconciliation, please email or call Kevin directly for a free consultation:   
 
Kevin Harper, CPA
kharper@kevinharpercpa.com
(510) 593-503

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