Reconciling Your Accounts
The best way to verify your account balances is to reconcile them with outside (meaning outside that account) information. Reconciling accounts simply means making sure they are in agreement with something else. Doing that assures the accuracy of your books, or lets you find and fix mistakes. In most cases, only balance sheet accounts will be reconciled, though any adjustments usually involve a revenue or expense account.
Although you can probably find a way to reconcile almost any account, the most common ones to tackle are cash, accounts receivable, inventory, and accounts payable. That doesn't mean you won't verify any of your other ledger account balances, but most of them won't require full-blown reconciliation throughout the year.
These procedures have to be done whether you use a computerized or manual accounting system. However, using accounting software also cuts down on the work burden here. In fact, most programs have special features for account reconciliation and devoted cash reconciliation modules.
The Cash Reconciliation
Cash account reconciliations (also called “bank recs”) are the ones most commonly performed. You probably do this every month with your personal checking account. This procedure isn't much different, except that you may end up with journal entries that you need to record. In this process (there is a full example in Chapter 10), you start with two sources of information: a cash account from the general ledger and the corresponding bank statement.
For a checking account, your cash balance and the balance on the bank statement won't match; they are not supposed to. The main reason for the difference is timing: The bank statement stops on a certain date, and your cash account keeps going. You will have written checks and made deposits since the bank's cutoff date. In addition, the statement may list bank fees and other charges or interest earned; that information probably has not hit your cash account yet. Then, of course, there's the possibility of errors on either side, which must be corrected promptly. The bank grants you about sixty days to notify it of its errors; if you don't do it in time, it may not adjust your account (especially when the adjustment would be in your favor).
Maintain a separate cash account in the ledger for every bank account your company has. Mixing them together in your books makes it nearly impossible to reconcile any of them. Linking each bank account to a distinct ledger account streamlines the reconciliation process, making your accounting job much easier.
Timing differences don't require any additional bookkeeping work. Items on the bank statement that you have not recorded yet, such as fees, require journal entries. The same goes for errors on your side; they require journal entries as well.
Accounts Receivable Reconciliation
Reconciling your accounts receivable mainly involves making sure the overall total of the customer ledger matches the balance of the general ledger account. These two sources are supposed to equal exactly, to the penny, but they often don't (particularly in manual systems, but sometimes even in computerized ones). It's very common to make adjustments to customer accounts in the subledger without doing the same in the journals or the main account, and that will cause some differences.
Customers will tell you their invoices or statements are wrong. They'll try to take discounts they don't deserve, or ask you to remove finance charges. When they call, it's easiest to make a notation on their file in the subledger and change their balance on the fly. The follow-up — a formal journal entry and posting — are easily overlooked during a busy day.
To find and fix these differences, start in the customer ledger. Look for any entries that seem haphazard or look like account corrections. Then go back through your cash receipts journal (where customer payments are recorded) and your sales journal (where on-account sales are recorded) to see if these entries have been written up. Any that have not been recorded require journal entries and posting at this point.
No matter how careful you are in recording your inventory as it moves in and out, it will virtually never match up exactly with a physical item count. There are several reasons for this mismatch, including damage, theft, and simple calculation errors. In any case, when you want to know where your inventory really stands, a physical count is usually the first order of business. When a physical count and a ledger account disagree, the physical count wins.
Once you have taken inventory, you can make any necessary adjustments in the general journal. Then you need to post to your ledger accounts to update them as well. If you have an inventory subledger (very common for companies with varied or extensive inventory), update the individual items also.
Accounts Payable Reconciliation
To make sure your accounts payable is accurate, you have to reconcile its general ledger account with the total vendor subledger. As with accounts receivable, these two sources can get out of balance if you update an individual vendor account without going through all the regular bookkeeping steps. An imbalance can occur when a vendor invoice doesn't mesh with your purchase order or when a vendor's account statement doesn't have the same balance as your subledger file.
Once you've straightened things out with the vendor, you can turn to your accounts. Errors on the vendor's part won't impact your book-keeping at all. Any changes that you need to make to update your accounts require journal entries and posting to both the subledger and general ledger accounts.