Best Practices for Account Reconciliation

Account reconciliation is an under appreciated yet critical control to help ensure an organization's financial integrity. Weaknesses and inefficiencies in the reconciliation process often lead to mistakes on the balance sheet and overall inaccuracies in the financial close. 

Since the enactment of Sarbanes Oxley (SOX) in 2002 and other rules and regulations that have followed, ensuring the accuracy of account reconciliations has become increasingly important. In the past, if an external auditor found a material error during review of a company's financial statements, it could still be corrected by the company with an adjusting entry. In most cases, the controller wouldn't have to issue a restatement, nor would the auditor have to report the error. 

With the advent of SOX, the call for compliance has risen to another level. If the auditor finds a material error, the company may be required to disclose a failure of controls. And, if the auditor finds a misstatement while reviewing the quarterly or annual SEC reports that the company cannot prove it would have found on its own, then the error is determined to be a material misstatement and a material weakness that could also require disclosure. 

An efficient, accurate, and timely financial close cycle (beginning with the account reconciliation process) can create a foundation for evaluating business performance, supporting organizational decisions, and satisfying external reporting requirements. Automation of the account reconciliation process is a critical step on the road to achieving "balance sheet integrity" - and ultimately, a timely and efficient financial close. However, software alone will not ensure account reconciliations are accurate.

Following this best practices list will send you on your way to error-free account reconciliations and a more efficient financial close:

Account reconciliations should be complete - no account left behind!

• Ensure all appropriate accounts are being reconciled, including new accounts.
• Ensure that there is an overall reconciliation policy and that it is adhered to company wide.
• Ensure that each reconciliation includes a title, description of the account, and procedures and/or instructions on how to complete the reconciliation (applicable contacts, reports to run or obtain, etc.).
• Documentation supporting the account balance should be included with the reconciliation.

Account reconciliations should be accurate.

• The individual preparing and reviewing the account should have a basic understanding of what the account is used for and what should be used to support the balance. For example, cash accounts will most often need the general ledger and a bank statement in order to perform the reconciliation.
• Ensure that the correct, most updated balances are being reconciled.
• Ensure that the reconciliation actually supports the balance and is not just a repeat of the general ledger or a roll-forward of the balance.
• Watch for accounts that have unusual balances (such as an accrual with a debit balance or a receivable account with a credit balance).

Account reconciliations should be completed and reviewed in a timely manner.

• Create due dates for the reconciliations. 
• Have a mechanism to track the status of each reconciliation.
• Make the high-risk account reconciliations due early on in the close cycle to identify any potential problems.
• Review the unidentified differences and post the necessary adjustments while the accounting period is still open.

Account reconciliations should support the appropriate accounting principles.

• Account reconciliations should follow their local accounting principles. 
• Ensure the reconciliations follow the principles, such as historical cost, matching, and full disclosure.
• Ensure the reconciliations are objective, that they identify material unidentified differences, that they are consistent, and that the transactions behind the general ledger balance followed the convention of conservatism.
• Reconciliations should follow company policies.

The account reconciliation process should be constantly reviewed and improved.

• Review the account reconciliation policy to ensure it accurately reflects the company's position.
• Review the overall process routinely to identify improvements that help drive quality and timeliness.
• Review the reconciliation procedures and/or instructions to ensure they answer: What? When? Who? Why? How Much?
• Use standard templates for the various types of reconciliations for consistency and ease of reviewing for accuracy and completeness.

Good tools and processes provide a framework for ensuring quality, accuracy, and completeness. They provide a means to track assignments, due dates, and work completion. A robust, automated account reconciliation process will focus the right people on the right activities and give management real-time information around the close process.

Source : http://www.accountingweb.com/technology/accounting-software/best-practices-for-account-reconciliation

bank reconciliation statement steps

1. Tick off all the items in the pass book with the entries in the bank column of the cash book and make a list of the entries as are found not ticked either in the cash book or the pass book. The unticked items are responsible for the difference in the balances shown by the cash book and the pass book.

2. Take balance as per cash book or pass book as the starting point.

3. Adjust the starting point with the other balance by adding or subtracting the unticked items as located in step1.

4. If balance as per cash book has been taken as the starting point, then balance as per cash book is to be adjusted according to entries passed in the passbook or viceversa.

The following table will help to prepare the Bank Reconciliation Statement.

		Starting Balance
	Items	Dr.Balance as per Cash book or Overdraft as per pass book	Cr. Balance as per Pass book or Overdraft as per cash book
1	Those items which affect the debit side of cash book
	a. Cheques deposited but not collected by bank	-	+
	b. Cheques though entered in the cash book but omitted to be sent to the bank.	-	+
2	Those items which affect the credit side of cash book
	a. Cheques issued but not presented for payment	+	-
3	Those items which affect the credit side of pass book
	a. Interest/Dividend credited by Bank	+	-
	b. Amount deposited directly by a customer into bank account	+	-
	c. Cheques sent to the bank but omitted to be entered into cash book	+	-
4	Those items which affect the debit side of pass book
	a. Bank charges charged by the bank	-	+
	b. Interest on Overdraft.	-	+
	c. Payment made by the bank on standing instructions of the customer	-	+

why bank reconciliation statement is prepared

Introduction

The statement that is prepared for reconciling the two balances (i.e., for explaining the difference between the two balances (Pass book balance - Cash book balance) is called Bank Reconciliation Statement.

The balance shown by the pass book is known as bank balance as per the pass book.

The balance shown by the bank account in the ledger or the bank columns in the cash book is known as bank balance as per the cash book.

Theoretically, the pass book balance should agree with the cash book balance on any date because the same transactions are entered in both the books.

But, in actual practice, these two balances do not agree owing to many reasons. The reasons for the difference between the two balances are as follows:

1.Cheques issued and entered in the cash book, but not presented to the bank for payment.

2.Cheques deposited into the bank for collection and entered in the cash book, but not collected by the bank.

3.Cheques received and entered in the cash book but not sent to the bank.

4.Direct payment into the trader's bank account by the customers of the trader entered (i.e., credited in the bank's book, but not entered in the cash book.

5.Bank commission, bank charges and interest on overdraft debited in the banker's book, but not entered in the cash book.

6.Interest allowed on bank balance by the banker and credited in the banker's book, but not entered in the cash book.

7.Interest and dividend collected and credited by the banker in the banker's book, but not entered in the cash book.

8.Cheques and bills sent to the bank for collection dishonoured and entered i.e., debited in the banker's book, but not entered in the cash book.

9. Payments made by the bank on behalf of the customer and debited in the bank's book, but not entered in the cash book.

10.Wrong entries in the cash book.

11.Wrong entries in the pass book.

Important

• Debit balance as per cash book means Cash at Bank.
• Credit balance as per cash book means Bank Overdraft.
• Debit balance as per pass book means Bank Overdraft.
• Credit balance as per pass book means Cash at Bank.

Bank Reconciliation Statement - BRS

A Bank Reconciliation Statement is a statement prepared by organizations to reconcile the balance of cash at bank in a company's own records with the bank statement on a particular date.

This statement is the most common tool used by organizations for reconciling the balance as per books of company with the bank statement and is made at the end of every month.

The main objective of reconciliation is to ascertain if the discrepancy is due to error rather than timing.

The difference between the two records on a given date may arise because of the following;

Cheques drawn but not yet presented to the bank

Cheques received but not yet deposited in the bank

Interest credited and not recorded in the organization's books

Bank charges debited but not recorded in the organization's books.


Let us discuss on this topic in detail in the coming posts....

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