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Bank Reconciliations

Sep 25Jeff Matthews

How often should a business reconcile its bank accounts to its general ledger?  Most businesses get the answer wrong.  Monthly reconciliations are not adequate.

The rules that apply to consumers do not apply to business accounts.

Consumer Rules:

 You have 60 days from the date a periodic statement containing a problem or error was sent to you to notify your financial institution. The best way to protect yourself if an error occurs – including erroneous charges or withdrawals from an account, or for a lost or stolen ATM or debit card – is to notify the financial institution by certified letter, return receipt requested, so you can prove that the institution received your letter. Keep a copy of the letter for your records.

If you fail to notify the institution of the error within 60 days, you may have little recourse. Under federal law, the institution has no obligation to conduct an investigation if you’ve missed the 60-day deadline.

Once you’ve notified the financial institution about an error on your statement, it has 10 business days to investigate. The institution must tell you the results of its investigation within three business days after completing it and must correct an error within one business day after determining that the error has occurred. If the institution needs more time, it usually is permitted to take up to 45 days to complete the investigation – but only if the money in dispute is returned to your account and you’re notified promptly of the credit. At the end of the investigation, if no error has been found, the institution may take the money back if it sends you a written explanation.

As a consumer, an error also may occur in connection with a point-of-sale purchase with a debit card. For example, an oil company might give you a debit card that lets you pay for gas purchases directly from your bank account. Or you may have a debit card that can be used for various types of retail purchases. These purchases will appear on your periodic statement from the bank. In case of an error on your account, however, you should contact the card issuer (for example, an oil company or a bank) at the address or phone number provided by the company. Once you’ve notified the company about the error, it has 10 business days to investigate and tell you the results. In this situation, it may take up to 90 days to complete an investigation, if the money in dispute is returned to your account and you’re notified promptly of the credit. If no error is found at the end of the investigation, the institution may take back the money if it sends you a written explanation.

Business rules:

Most banks will work with businesses to correct mistakes but the Electronic Fund Transfer Act, Regulation E, protects only consumers not businesses.  The amount of protection provided to your business for banking errors is regulated by the bank’s policies.

Best Practices:

  1. Every business should review the bank activity daily to ensure that all transactions posted to the account were correct and recorded in the general ledger.
  2. All credit card activity should be reconciled daily to the bank statement.  Each of the major cards has different rules for crediting credit card sales to your account.  Become familiar with those rules and reconcile your activity submitted to the processer with the activity hitting your bank account.  Also understand how the credit card processing fees will be deducted so that you can balance net fees to the general ledger when you record the sale transaction.  There are good online tools provided by the major processing firms that allow you to balance your submission with the bank activity.
  3. Watch for automatic withdrawals.  These may be transactions you have pre-authorized for a leasing company, lender, or supplier to debit your account.  Ensure that these are correct and recorded in the general ledger.  The payment of company credit card programs are often withdrawn automatically from your account on a specific day.
  4. Some banks are converting checks issued into debit transactions.  If you are downloading bank activity into your accounting package to reconcile your account, these conversions may cause an unmatched charge and an erroneous outstanding check.  Sloppy recording of these conversions can also pose escheatment problems.
  5. If you pay employees or suppliers via ACH, often referred to as direct deposit, ensure that all transactions are recorded promptly in the general ledger and reconciled to the bank account.  Normally ACH transactions clear as a batch rather than an individual disbursement so be sure to reconcile the batch totals to the source.  Investigate and settle all ACH returns promptly.
  6. Some customers pay you electronically.  Daily review of your bank activity will ensure that these transactions are recorded in the general ledger and accounts receivable aging in a timely manner.  It is essential to post electronic payments as quickly as you apply customer checks so that collection efforts can promptly address missed invoices or other discrepancies.
  7. You may have deposits being made by branch locations. Ensure you have procedures that promptly notify the reconciler of all deposits and that these payments are promptly posted to the customer’s account.  This is essential if your branch operations are depositing cash.
  8. Have at least a summary of outstanding checks and roll it forward daily.  A simple beginning balance + amount of checks issued – checks clearing = ending balance.  This has two benefits, you can ensure that the balance makes sense without reconciling each check clearing daily.  It also gives you good information for projecting the lag or float from uncleared checks.  Checks that are converted to debits can distort your reconciliation of outstanding checks.

Other banking practices that just make sense:

  1. Segregate duties.  It is smart to have someone reconcile the bank account who does not have the authority to record transactions in the ledger or make transactions in the bank accounts.  At a minimum, a knowledgeable person should review the bank reconciliation that is prepared monthly.
  2. Have strong controls established with your bank on the opening and closing of bank accounts.   No one should be able to open a new account or close a bank account without an officer or owner’s written authorization.
  3. Use the security your bank provides.  Policies that require expiring passwords and access tokens are smart business steps.  Talk with your banker about the tools they offer.
  4. Work with your bank to structure your accounts to avoid exposure to your entire balance.  Do not allow payroll and disbursing accounts to automatically sweep against your concentration account.  These will be the accounts that fraudulent items are most likely to be presented against as the account information is widely known to your suppliers and employees.
  5. Place strong controls on employee and supplier banking information in your systems and do not allow it to be changed without a confirming paper trail.  You don’t want an employee rerouting electronic payments to an unintended bank account.  Many states have laws that require the securing of employee data such as home address and bank account information (not all state laws have the same requirements).

Business bank accounts have a much greater volume of transactions than consumer accounts and the federal rules do not afford businesses the same level of protection.  Therefore you should have policies and procedures in place to make sure all activity in your bank account is accurate and recorded in a timely fashion.  And likewise to ensure that all general ledger activity is posted to your bank account.

B2B CFO®

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