Why Your Bank Reconciliation Is Falling Short
Many clients that come to us with messy books reconcile their operating bank accounts every month. Yep, the bookkeeper checks off the cleared items, gets to zero difference in the QuickBooks reconciliation window and happily clicks to Finish the reconciliation.
If you are reconciling each month, why can you still have so many problems?
The answer lies in the transactions NOT being checked off as clearing the bank. There can be many other reasons as well, but we’ll focus on this one since we run into it so often. If you are a nonprofit manager, looking at the list of UNcleared transactions is something you should be doing each and every month. To better understand why, consider this example based on a real client.
A Real Life Example
A nonprofit organization had a bank reconciliation for their operating checking account in QuickBooks that looked something like this:
|1.||Dec. 1, 2017 balance per bank statement:||28,150|
|2.||Checks and payments cleared:||(42,100)|
|3.||Deposits and other credits cleared:||95,620|
|4.||Dec. 31, 2017 balance per bank statement:||81,670|
|5.||Uncleared transactions as of Dec. 31, 2017||(16,525)|
|6.||Register balance as of Dec. 31, 2017||65,145|
The first four lines of the bank reconciliation above are well and good. They accounted for all the transactions that cleared the bank in December. (Whether transactions are recorded to the proper accounts, such as contribution income, expenses, fixed asset additions, etc., is another matter.)
The problem for this organization is in the UNcleared transactions totaling $16,525 shown above on line 5. (The terms “uncleared” and “outstanding” mean the same thing.) Uncleared transactions for this reconciliation are those dated Dec. 31, 2017 or earlier that did not clear the bank by Dec. 31. They include uncleared checks written in December or earlier and any deposits made at the end of December that did not show up on the bank statement until January (deposits in transit).
Where’s the Detail?
Unfortunately you have to dig a little to find the detail of uncleared transactions in QuickBooks. Below the bank reconciliation summary in QuickBooks as shown above, you’ll see a list of cleared transactions (detail of lines 2 and 3 above). This list can be rather lengthy if you have a lot of transactions.
Finally below the list of cleared transactions you’ll find a list of UNcleared transactions. This is the list you want to be sure to look at every month. Think of it as your punch list of bookkeeping mess to clean up.
Problems We Found
In our client’s bank reconciliation shown above, we found the $16,525 on line 5 was comprised of nearly 60 uncleared transactions. Some dated back to early 2017. (We’ve seen bank reconciliations from other organizations where uncleared transactions were even older, sometimes going back several years!) Many of the outstanding items for this organization appeared to be errors. For example:
- An expense entry to an office supply store for $16.15. This was probably a debit card transaction and should have cleared right away.
- A deposit of $73.44 in November. Deposits in transit should always be dated at the very end of the period being reconciled. If you have an old deposit in transit, you have an error that needs to be fixed.
Most of the old outstanding items were checks, many for small dollar amounts. It’s possible these are valid outstanding checks. If so, someone needs to contact the payees to see if they need a replacement check or ask them to deposit the check that was issued.
Actions to Take
You need to look closely at each item on the detail list of uncleared transactions and take appropriate actions:
- Fix errors, for example delete duplicated entries and void checks that should be voided.
- For checks outstanding more than one statement cycle, contact people and ask them to deposit their checks. Void and reissue lost checks.
- Ensure any items remaining on the list of uncleared transactions represent valid, outstanding transactions no more than six months old. If repeated attempts to contact a payee fail, void the check, issue a stop payment request if the amount is significant, and reclassify it to abandoned property.
In the State of Florida if a payee never deposits or cashes a check, then you are legally obligated to turn over that check to the State of Florida as abandoned property. The time period to hold checks before you submit them to the State is five years for accounts payable and one year for payroll checks. Managing abandoned property is a lot of work! Better to keep your list of uncleared checks cleaned up you go along.
Timely follow up makes it easier to get payees to deposit their checks and to resolve errors. The longer you wait, the harder it will be to clean up old outstanding items. Memories fade; people move. The real work on the bank reconciliation begins AFTER the bank reconciliation is finished and you have identified the uncleared items. Keeping a good list of outstanding items will help you have more accurate books and stay in compliance with abandoned property law.
We’ll close with two tips:
- Both the bookkeeper doing the bank reconciliation and the manager overseeing the bank reconciliation should look closely at the list of uncleared transactions each month to make sure all uncleared items are valid and are being managed appropriately.
- Consider cutting down on checks to reduce the workload of managing outstanding checks. See our post on eliminating checks.