Bank reconciliations are hard enough, and unless things are going smoothly, can be postponed until this important task becomes a mountain to climb.
First lets answer why.
Why is it important to reconcile accounts?
Account reconciliations ensure that the General Ledger (GL), is in line with what really happened. Simple really, but for anyone that has done them, we know they aren’t.
One of the biggest issues that can come up are uncleared checks. Which can reduce the GL’s checking account balance inappropriately, understating the balance sheet.
Aside from presenting bad information on the balance sheet, there is a real risk of having not paid a vendor or employee. If a check was printed, processed through the GL, but never mailed, it will sit as an uncleared check but the invoice will show as paid. When in actuality the vendor was never paid.
Another real risk is escheatment (Click here for a very detailed explanation of this.) The simplified version is that if this check were real, and was simply not cashed after a certain period of time it needs to be surrendered to the state as unclaimed property, state law dependent.
So, each uncleared check needs to be thoroughly investigated, and documented.
For those checks that are uncleared because of an erroneous entry, perhaps they were generated in the system, but not printed. Then later when the vendor hadn’t been paid a check was hand written, not recorded properly in the GL. So, there has been a double payment in the books.
We had a client whose previous bookkeeper had done this accidentally for several years. As a result we had to unclear checks from current and prior periods. These are two separate processes.
For checks recorded twice within the current period the extra/uncleared one can be voided. **Don’t forget to ensure you properly investigate to make sure this is really the case.**
For uncleared checks from prior period, things get more complicated. We spent a lot of time trying to come up with the best approach, making the below considerations. But also wanting to make sure that there was a trail that could be followed later.
Overstatement of expenses from prior periods. Quickbooks automatically books a debit to expense and a credit to the bank when a check is written. Because that check had not cleared the expense remained while the check waited to be cashed, and is now in Retained Earnings.
Quickbooks processes require that the check be cleared, which will generate the entry, but a simple JE will not clear the check appropriately.
- Create a Ghost customer “Deposit” and jobs for each year to categorize each item.
- Create a bill for each transaction from each vendor, for the amount of the check. And bill that invoice to the corresponding Job #. A 2012 transaction goes to job R02012, customer deposit.
- After each entry was made generate an invoice for each job #, including all the uncleared checks.
- Record a receipt of payment from ghost Customer Deposit.
- Use the payment for each year to pay off each job.
- In the reconciliation tool, reconcile the deposit against the uncleared checks.
- As the creation of the original invoice for each vendor will leave a payable on the GL, a credit will need to be created to match each transaction.
- In the Pay bills tool, pay each invoice using the applied credits. This will eliminate the payable created in step 2.
The important thing is that this process addresses both the accounting considerations as well as Quickbooks unique needs. The other thing, is that since we are recording revenues as they relate to the credits from vendors it will correct the inappropriate expenses from prior period, but will result in revenues on the income statement.
Best of luck.