Cash Reconciliation

Author: Neil Conway

The No Frills Guide to Managing Bank Reconciliations

What could be the most underestimated task in any office?  The answer arguably could be the cash account reconciliation.  Bank reconciliations are among the most important tasks in maintaining accuracy of financial record keeping and may even be the single most important internal control at a company.

Unless you are the poor soul assigned this task, you probably do not realize what a jigsaw puzzle nightmare a bank reconciliation can be for even a small business.  This is especially true for larger firms that use methods like “consolidated or pooled cash”.  So, given that the accountant assigned this task often has limited time and resources, this begs the question:

What Options are Available?

We will assume the reader is the poor soul assigned the task of one of these bank reconciliations and has been given no budget and little time to perform one.  With no cash available to purchase one of the fancy semi-automated bank reconciliations, there still exists some viable options to perform one of the complex bank reconciliations.  The no frills road may not give you the fastest method but it will give you a reasonable road to travel when you have to get this task done.

To accomplish this task, we should identify how far down the creek you are without a paddle.  Are we talking about a bank reconciliation with 200 transactions or less?  Then, you have many more options available than your fellow readers.  Do you have 1,000 transactions to reconcile and multiple accounts combined into a pooled cash arrangement?  You, my friend, need to read further.

Let us start with the (relatively) lucky person who only has 200 or less transactions.  You conceivably could do this reconciliation manually in a reasonable amount of time.  This is mainly a task of staying organized.  The worst stumbling block of what I would consider a “light” bank reconciliation is getting interrupted and having to start over multiple times.  I often see this picture from people trying to perform a bank reconciliation manually:

perform a bank reconciliation

The different colored markers do not represent some sophisticated system of identifying matching transactions.  Each color represents the user having to start over.

So, if you are doing a manual cash reconciliation, you are very likely using what I call the “cross out method”.  You take a list of checks and deposits from your accounting system.  You compare that to a bank statement and cross out items that “match”.  Usually people like to use highlighters to perform a bank reconciliation method in this capacity.  However, this method has the distinct disadvantage of causing the user to start over if s/he loses concentration.  That is why you would not want to even consider this method unless you had less than 200 transactions.  I would even advise that more than 25 should not be done manually.

This brings up a second method of performing a cash account reconciliation and the method used by many accountants.  They use Microsoft Excel to perform bank reconciliations.  I was one of these poor souls who used excel to do a bank reconciliation.  While I am almost religious about my devotion to excel, I have come to recognize its limitations especially when dealing with a bank reconciliation.

Excel does not have ANY safeguards available for cash and bank reconciliations (unless you program them via formulas or macros).  So, if you have to reconcile more than 25 transactions, you are rolling the dice if you use excel.  If your office provides multiple interruptions during your day, you are using a less than optimal system for reconciling a bank account.  I have found this true even for seasoned experts.

If you do use excel, it generally involves the same method as doing a manual cash reconciliation via paper.  You should create a list of transactions from your accounting system and compare that to a list of transactions from your bank account.  Excel offers the advantage of dynamically showing you the total amount of each respective list.  This is a key advantage of course over a paper based reconciliation.  The following is a typical list of transactions created in excel:

a typical list of transactions created in excel

In most cases, though, Excel’s benefits do not outweigh its costs in reconciling bank reconciliations when compared to other methods.  Often, even a detailed season expert accountant will have factors like:

– additional transactions that were added

– a missed formula or total that throws off the balance

– a set of corrections that require restarting the process.

This leads us to the final recommendation.

A cash and bank reconciliation is a linear process.  This is true for beginners.  It is also true (especially) for experts.  You have to clear each step in the reconciliation process.  Otherwise, you are doomed to eventually start over on a complex bank reconciliation process.  This is especially true if you have one of the larger more complex reconciliations. The conclusion I have reached from this is that the software has to recognize the step by step process and enforce each step of a reconciliation.

What free software is available for bank reconciliations?

The one that emerges from my own wish list as an accountant who tutors and also “rescues” accountants with a complex cash account reconciliation process is “ClearRec”.  You  can use it to do as many large cash and bank reconciliations as you wish with the free version.   One of the main differences between the paid and free version is the “autoclear” feature.  You will manually match all transactions yourself in the free version versus using the auto-match  (a.k.a. autoclear) of the paid versions.  This is still better than using Excel or a paper based method where you can easily get out of balance.

Reconciliation Accounting

It enforces each step along the way and will offer many important advantages like:

Splitting transactions – What if your accounting journal entry/deposit is too summarized.  You need to clear only part of the transaction.  This is where splitting the transaction becomes essential.

Adjusting on the fly – Rarely do you encounter a bank reconciliation that does not have an adjustment or multiple adjustments needed. This should be done in a disciplined process and not something that requires you to “adjust and start over”.

Flexibility for multiple accounts – I’ve found that some programmers of accounting software do not even know what consolidated cash means.  If you do have to deal with one of the more complex reconciliations involving consolidated cash, make sure you find something that is designed by an accountant who has dealt with a consolidated cash reconciliation.

You may be in a position to be a hero or the next poor soul that is not given enough support to accomplish a bank reconciliation.  With the right tools, you may be an indispensable tool to your company that needs your reconciliation skills.

 

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