Reconciliation of accounting records

A review mechanism for checking cash flows, accounts and bookings.

DESCRIPTION

Reconciliation of accounting records is a review mechanism in which the integrity of different parts of an accounting system is verified.¹ This checking duty is the key responsibility of the financial manager and he/she needs to be held responsible for any irregularities.

PURPOSE & LINK TO INTEGRITY

The purpose of reconciliation is to ensure that the accounting records of organisations are free of errors or omissions by balancing the cash book to the bank statement.¹ For this, checklists can help to ensure that all important points are being considered in the organisation’s review and that no important aspects are being forgotten. Effective account reconciliation activities greatly increase executives’ ability to proactively identify and resolve issues that could result in misstatements and could lead to substantial write-offs. They also help to safeguard cash by detecting errors.^2,3

Reconciliation of accounting records is the most important instrument to detect any irregularities in accounting. It can prevent fraud like falsified or amended accounting records that allow unauthorised payments. Moreover, it strengthens the organisation’s internal control, which in turn enhances accountability .^3,4 Reconciliation can also uncover theft, ghost workers or ghost equipment.

KEY REQUIREMENTS

• Does your organization have an adequate accounting and reporting system in place to ensure that the accounts can be revised? (also check tools Accounting & finance manual and Asset management)

HOW TO

Reconciliation of accounting records should be performed monthly or more frequently depending on the type of record.³ Depending on the size and complexity of the organisation, various tools can be used to verify accounting records, from simple lists or excel tools for small companies, to specialised reconciliation software for larger enterprises.

A review should cover the following aspects and records that should be reconciled at regular intervals are:^1,5

• Cash Flow: Especially for companies, cash flow is essential. When reviewing the cash flow, the following elements should be considered:
  • Timing of payables and receivables. Scrutinise when cash is received and dispersed.
  • Major expenditures. How will they be funded? While some strategic outlays such as a new facility may call for debt financing, others can often be paid for from cash flow if you plan ahead.
  • Lines of credit. Sometimes unanticipated major expenses just happen. A critical piece of equipment suddenly dies, or a one-time opportunity offers itself that requires substantial outlays. That’s why it’s wise to establish a line of credit well in advance, so you’ll be prepared when the unexpected occurs.
  • Petty cash book. Count up all the payments made since the last reimbursement, counting the cash in the tin. Cash should be counted and reconciled at least weekly.
  • Wages book. Reconcile wage books every month to ensure that the correct deductions are being made and passed on to the relevant authority.
• Balance Sheet: A critical part of any financial review should be an assessment of your organisation’s net worth — its assets and liabilities and how leveraged and liquid it is. While the makeup and structure of balance sheets varies widely, there are several general points which are important to cover:
  • How indebted is your organisation? Look at the ratio of debt to equity and see how it compares with your peers.
  • Next to cash flow, short-term assets are a critical resource for meeting an organisation’s liquidity needs. If you cannot collect on a major invoice, will you be able to cash in some assets without taking a hit? Calculate your current ratio of short-term assets to short-term liabilities to see how well your organisation can meet its short-term liabilities.
  • What’s the “right” inventory level? This will depend upon the nature of your organisation. Consider setting a target inventory and adjusting it as needed, keeping in mind that too much means tying up capital that could be used more productively elsewhere, while too little means potential delays in production or delivery of goods or services.
  • Stock control records. Check stock records against the supplies held in the store and receipts from sales to ensure that no errors have crept in (and no stock has crept out).
  • Bank records. Ensure that the organisation’s own records agree with the bank’s records, which are like a parallel set of records. This should be reconciled once a month.
• Expenses: Cost control is integral to running any organisation. It means identifying when and where costs are getting out of hand, while not scrimping on the areas that warrant the expense.
  • When scrutinising costs, look for cost trends. Compare with last year, not just last month. Do any variations stand out? You should see increases in areas you have targeted for growth, but not across the board. If you find otherwise, it may be time to cut back.
  • As you examine cost trends, think about the procedures you have in place to control costs. Who approves what, and is it working? Consider processes that might better control expenses on an ongoing basis.
• Taxes. Periodic financial reviews are the ideal time to identify potential tax savings. Accountants can potentially help to lower your tax bill with different methods of booking revenues or expenses, or by taking advantage of qualifying tax credits.

KEY GUIDING DOCUMENTS

Citibank, no year. Your Financial Review Checklist, https://online.citibank.com/US/JRS/pands/detail.do?ID=CitiBizArticleFinancialReviewChecklist, accessed 28.10.2015

Office of State Comptroller, no year, Technical assistance bulletin, Office of State Comptroller, USA

PWC, 2007, How to improve account reconciliation activities, PricewaterhouseCoopers (PWC), USA

FURTHER  READINGS

MANGO, 2012, Financial Management Essentials – A Handbook for NGOs, Management Accounting for Non-governmental Organisations (MANGO), UK

Futurpreneur Canada, no year, Conducting financial reviews, http://www.cybf.ca/cybf_resources/struggling-with-the-financials/conducting-financial-reviews/, accessed 28.10.2015

Fraud Prevention, no year, Risks associated with cash handling, Fraud Prevention, http://www.fraud-stoppers.info/risks/cash.html, accessed 02.12.2015

FULL REFERENCES

1. MANGO, 2012, Financial Management Essentials – A Handbook for NGOs, Management Accounting for Non-governmental Organisations (MANGO), UK
2. PWC, 2007, How to improve account reconciliation activities, PricewaterhouseCoopers (PWC), USA
3. Office of State Comptroller , no year, Technical assistance bulletin, Office of State Comptroller, USA
4. Fraud Prevention, no year, Risks associated with cash handling, Fraud Prevention, http://www.fraud-stoppers.info/risks/cash.html, accessed 02.12.2015
5. Citibank, no year. Your Financial Review Checklist, https://online.citibank.com/US/JRS/pands/detail.do?ID=CitiBizArticleFinancialReviewChecklist, accessed 28.10.2015