Reconciling bank accounts helps to identify old/uncleared items that otherwise may go unnoticed. Missing transactions such as electronic payments, potential fraud instances, and irregular register balances are a few key problems that a reconciliation can bring to light. An often overlooked concern are the outstanding transactions still hanging out there after reconciling.
Why is it important to take a deeper look into these transactions? Many times, transactions are duplicated or entered under an incorrect bank account. This could, potentially, grossly overstate income or expenses. If there are several outstanding deposits that were entered in error, it appears there is more money available to spend – which could lead to overspending and overdraft fees. The opposite is true for outstanding expense transactions. Excess or duplicate withdrawals incorrectly decrease the funds available for necessary business items.
The initial reaction to clean up the outstanding transactions might be to simply delete them. STOP! Removing old transactions, without knowing the history for each, can cause headaches down the line. Any transaction from a prior period, duplicate or not, must be removed with an adjusting journal entry, rather than deleting, to leave that period’s records intact. (This is particularly true when it’s a closed fiscal year with a completed tax return.) Make sure the journal entry is dated in the current period and hits the same expense/income accounts as the original transaction.
For checks that are outstanding, a little additional ground work is required. To begin, look at the vendor history to help determine if the transaction is truly from an outstanding check or if it is a duplicate entry. If it’s determined that the transaction is a duplicate – the next step is to look at the period in which the transaction is posted. A phone call to the payee may be necessary to determine if the original amount is still, in fact, owed. For instance, a check for a utility bill that was lost would have had the amount made up on a subsequent bill and payment. However, an old paycheck to a terminated employee needs to be reissued if it wasn’t cashed. It doesn’t matter if the employee hasn’t reached out to request a reissued check. The wages would have been reported on the employee’s W-2, and the individual is still entitled to the funds. In these cases, journal entries need to be entered in the current period to “reverse” the outstanding checks. Then, new checks can be issued in the same period, and referencing the same accounts as the reversing journal entries.
Now that the outstanding transactions have been removed or reissued, now what? When reconciling the bank accounts, there should be a debit and credit for each outstanding transaction that was cleared up. Checking off the old transactions and the journal entry used to remove the transaction should net to $0.00 and leave the reissued transactions in the current period. The reissued checks will be cleared in the bank reconciliation once they appear on the bank statement.
Keeping reconciliations current and following up on outstanding transactions makes statement reconciliation easier, keeps the cash account balances more accurate, and helps get issues corrected before they get out of hand.
If you have any questions or need assistance with QuickBooks, please contact the QuickBooks ProAdvisors at Ketel Thorstenson, LLP.