Account Reconciliation as a Control—Performance

This blog is the first in the series, Account Reconciliation as a Control.

I hate to insult people’s intelligence by covering this topic, but it is amazing the number of people who perform reconciliations incorrectly. This blog post is intended to educate rookies and seasoned veterans. Rookies are seeking a base knowledge to help them understand account reconciliations, while the seasoned veterans are seeking confirmation that they are performing them correctly.

Don’t be embarrassed if you are doing it wrong because you probably never had proper training. Most people learn from their predecessor, a checklist, or they just had to figure it out. During my brief time in industry, I learned from my boss. I use the word “learn” loosely because it was me figuring it out and her telling me that I did it wrong. It was a great learning experience.

I was responsible for reconciling the bank accounts, credit card activity, and any accrued revenue accounts. This was quite a task for someone who had never performed an account recon before in his life. I had heard about them and had even seen a few during my first five years of professional practice, but I didn’t know how to perform one.

Do you think I was willing to admit that I didn’t have a clue? You’re right—I wasn’t. I struggled with admitting my lack of knowledge and didn’t ask questions because I believed account reconciliations were a basic process that everyone knew about. At this point in my career, I have seen many people have the same lack of knowledge and most are not willing to admit it. However, we never learned how to do them in school, most of us have never perform one in our career, and they are not simple to perform—some reconciliations can be very complex.

This will be a crash course of who, what, when, and how related to performing an account reconciliation.

• Who – The ideal person to perform an account recon is someone who has knowledge of the activity in the account but is not involved in the day-to-day transactions that are recorded in the account. If the resources are available, this is an opportunity to enhance segregation of duties by bringing in another set of eyes to monitor the activity.
• What – This one’s easy…all balance sheet accounts—assets, liabilities, and equity.
• When – Most companies perform recons on a monthly basis and require them to be completed within a certain number of days after month-end close. This is a good practice to implement.
• How – Based on how certain accounts are reconciled, there are four categories, which are included below:

1. Reconciling activity to identify the difference between independent records (e.g., bank) and accounting records (e.g., book) and to ensure that the independent and accounting records are correct. Bank account activities are reconciled in this way, which is similar to taking a matching test where there are words on one side (book) and definitions on the other (bank). The goal is to match each word to its definition, which means that only one word matches one definition. But there could be some words without matching definitions and some definitions without words. When you are finished reconciling, these leftover words/definitions are “unreconciled,” and you hope that a word/definition will come up in the next month that will match. When reconciling items against each other, they need to be the same transactions. I realize this area needs to be covered in greater detail, and I plan to address that in a future blog post. However, I will also cover some of the pitfalls I have seen in this area in this series.
2. Identifying activity to determine the items that make up the balance. This account category includes accounts like pre-paid expenses, accrued revenues, accrued liabilities, and other receivables. Ideally, the goal is to identify the parties that are part of the balance and the amount associated with each party. For example, let’s start with a zero balance. During August, we pay an annual insurance premium to ABC Insurance Co. of $1,200 for a policy that covers the period 8/1/16 through 7/31/17. Therefore, we record an asset of $1,100 in the month of August and reduce insurance expense by the same amount. This balance will be reduced by $100 per month by moving it from an asset account to an expense account every month. The account reconciliation would show a list of all the pre-paid expenses and the balance that hasn’t been expensed yet. This is fairly easy, but I have intelligent accounting personnel mess it up. I will cover some of these pitfalls later in the series.
3. Sub-ledger activity is a reconciliation that doesn’t require a ton of work and is fairly straight-forward. The supporting information for these accounts is in the sub-ledger details which usually include information about the aging of account balances. Accounts receivable and accounts payable are examples of this type of account recon.
4. Roll-forward activity to identify the change in the account balance between two periods. This process involves a starting balance, detailing out the account activity, and stating the ending balance. This is only applicable for equity accounts. For example, a member’s capital account had a beginning balance of $10,000. The owner took a draw of $2,000 during the month. This would result in an $8,000 ending balance for the member.

I hope this post will start the conversation and answer questions to help you learn more about the account recon process. Next week, I will discuss reviewing the account recons which will take account recons from a process to an actual internal control.

If you ever have an idea for a future blog or a question about a published blog, please contact me with your thoughts. I would love to hear from you.

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