How does account reconciliation work?

By: Stephen L. Nelson | Posted: 21st February 2008

There are several common errors that account reconciliation won’t catch. We’ll briefly describe these errors here, because if you know about them—and most importantly know their effect—you are less likely to make them. You also increase the chances that you’ll detect and correct the errors.

The New Forgotten Transaction

The first kind of error that reconciliation won’t catch is one in which you forget to record a transaction in Money and the transaction hasn’t yet cleared the bank. If you forget to record a check and the check is still outstanding at the end of the statement
month, for example, the check doesn’t appear in your register and it doesn’t get listed on your bank statement. In this case, your Money account register actually overstates your account balance by the amount of the check you forgot. You’re more likely in this
situation to overdraw your account, of course, because you think you have more money than you actually do.
A deposit error can occur in roughly the same way, except that the amounts are flipflopped.
If you forget to record a deposit in Money and it hasn’t yet cleared the bank, the Money account register understates your true account balance. In this case, you are holding cash in your account that you are not even aware of, which means that you may lose interest on it (perhaps by forgetting to move the money to your money market
account).

The Fictitious Transaction

Another kind of error that a bank reconciliation won’t catch stems from entering a fictitious transaction in the Money account register. For example, if you enter a check in the Money account register that you never wrote or a deposit you never made, the
check or deposit will never clear the bank. In this case, the Money account register includes a fake transaction and uses that transaction to recalculate the bank account balance. But the transaction, because it’s not real, never shows up on your bank statement. Fictitious checks understate your bank account balance, and fictitious deposits overstate your bank account balance.
Now obviously, you wouldn’t knowingly or purposely enter a fictitious transaction in your register. But it’s surprisingly easy to do so. Fictitious transactions typically occur when you enter the withdrawal or deposit transaction in the Money account register but then forget to complete the paperwork necessary to actually make the withdrawal or deposit. (This can sometimes happen if you're using Money to keep the books for a small business--say an S corporation or limited liability company--and you've got more than one person entering data into the Money registers.)

What to do about the Tough-to-spot Errors

Unfortunately, there is not much you can do to find these sorts of errors. Mostly, you need to apply simple common sense to prevent them. In the case of forgotten uncleared transactions, your only recourse is to be careful in your record keeping. Try to
establish a system whereby you regularly record the checks you write and the deposits you make.
In the case of fictitious transactions, your only recourse is to make sure that you don’t record checks or deposits to your Money account register except when you are really writing a check or making a deposit.
During the reconciliation process, you review a list of outstanding transactions. If you see extremely old outstanding transactions, it could mean something. Perhaps somebody hasn’t cashed the check, or perhaps the bank has lost a deposit you mailed.
Extremely old outstanding transactions, however, could also be fictitious transactions.

CPA Stephen L. Nelson is the author of do it yourself kits for
href="http://www.fasteasyincorporationkits.com/NewJerseyCorporationKit.htm">New Jersey incorporation,
href="http://www.scorporationsexplained.com/doityourself_NewJerseySCorp.htm">New Jersey S corporation, and
href="http://www.llcsexplained.com/doityourself_NewJersey.htm">New Jersey llc formation.
Trying to print a report or chart in Microsoft Money? Follow these simple steps, says CPA and computer book author Stephen L. Nelson. This article is copyright
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