OVERVIEW OF account reconciliation

Prior to reviewing this standard, it is important to understand the process of closing and the parties responsible for completing the closing process.

Closing refers to the process of finalizing an entity’s financial information and creating reports after a specified accounting period has ended. Closing procedures are performed on an interim and year-end basis to keep accounting data organized and ensure all transactions for the period are properly accounted for and recorded on a timely and accurate basis. The Office of the University Controller requires Constituent Reporting Units (CRUs) to submit closing documentation on an interim and year-end basis. A CRU is determined by meeting a $35,000,000 threshold in revenues, expenses, or net assets for a minimum of 2 consecutive years. A CRU will be removed from the list if the threshold is not met for 3 consecutive years. Review the internal controls and roles and responsibilities IU accounting standards book for a detailed explanation of a Constituent Reporting Unit and a List of Active CRUs at Indiana University. Key fiscal officers within a CRU are responsible for several items at interim close including reviewing IU accounting standards, reviewing system and user roles, financial statement variance analysis, balance sheet balance substantiation, posting and reviewing accruals, and account reconciliation. Key fiscal officer responsibilities included in year-end close procedures consist of interim closing activities in addition to specific year-end items such as org reversion, covering cash balances, and sub-certification. Both interim and year-end closing procedures are accompanied by a checklist to be submitted by the CRU alongside required materials. The list and relevant scope are subject to change annually and individual specific requirements as determined by each campus and/or RC need to be considered in addition to this checklist.

Review the UCO Fiscal Officer Calendar for closing deadlines. It is important to note that several KFS e-docs are due by a specific date. If you use Financial Processing (FP) e-docs in KFS, these documents must be in the system and fully approved by 10:00 p.m. for the entries to be processed by the accounting cycle and reflected in the closing reports. Because some KFS e-docs require additional administrative approvals, on the day of each closing, e-docs should be completed by 12:00 p.m. to allow for all necessary routing and approvals. If you require access to KFS, please contact your RC fiscal officer.

Account Reconciliation

Prerequisites

Prior to reading the standard on Account Reconciliation, it is beneficial to review the below standards to gain foundational information:

1. Accounting Fundamentals Standards
2. Financial Statements Standards
3. Closing Standards

Preface

This portion of the standard discusses the elements of the account reconciliation process and how it is conducted internally within Indiana University. Information presented below will walk through what an account reconciliation is, how to complete this closing procedure, and requirements and best practices related to this process.

Introduction

Note, this standard should be reviewed prior to reading account specific reconciliation standards.

Account reconciliation is a fundamental accounting process that ensures the integrity of financial transactions. Reconciliations are a review of operating reports to ensure that the balances posted to an account are those that were approved by the fiscal officer, or their delegate, and that they are allowable and appropriate. Performing account reconciliations on a monthly basis per Generally Accepted Accounting Principles (GAAP) helps in understanding the entity’s financial status, discovering accounting errors and inaccuracies, ensuring completeness, and detecting incidents of theft or fraud.

Reconciliation is the comparison of individual object codes within the general ledger with source documents and subsidiary ledgers and systems. For example, source documents include external sources, timesheets, inventory listings, contracts, capital asset listings, bank, or credit card statements. In addition, reconciliation means ensuring transactional activity has occurred as expected and individual accounting transactions are accounted for and supported.

Importance and Impact of Account Reconciliation

Reconciling accounts is a crucial internal control measure to ensure accurate financial reporting. Reviewing the flow of financial transactions within an account helps identify transaction errors, inaccurate balances, improper spending, embezzlement, and highlights other negative activity, such as theft or fraud. Failure to detect these errors may lead to issues concerning internal controls or the accuracy of the financial statements which impacts future funding from government organizations, creditors, or individual donors.

In order to ensure the integrity of an entity’s financial reports, it is important that each entity performs account reconciliations on a regular basis. By performing account reconciliations as part of normal close accounting procedures, the university can produce reliable and accurate financial statements free from incorrect or misleading information that could result in false conclusions. This is important since these periodic reports are used at the account, organization, and university level in the university’s externally audited consolidated financial statements and to make management decisions that impact the future of the entity.

How to Perform an Account Reconciliation

Properly reconciling an account involves:

• Confirming all transactions have been recorded and accounted for appropriately during the period
• Determining all subsidiary ledgers and systems reconcile to the object code balances in the general ledger
• Ensuring balances in all object codes are substantiated and supported
• Ensuring documentation exists for all non-system-generated entries – refer to the Balance Sheet Substantiation Standard for further information on substantiating non-system-generated entries

Recommendations for reconciling specific object level balances will be included in their respective sections of the IU accounting standards books.

Reconciliation Process

Types of account reconciliations include, but are not limited to, accounts receivable reconciliation, accounts payable reconciliation, unearned revenue reconciliation, and prepaid reconciliations. Standard procedures are in place to ensure consistent and efficient review of the account activity. The reconciliation process at the account level is typically comprised of the following steps:

NOTE: The focus of the reconciliation process is to ensure accuracy and appropriateness of beginning and ending balances.

• Beginning balance investigation – Match the beginning balance in the account to the ending reconciliation detail from the prior period. If the amounts do not match, investigate the reason for the variance in the prior period. If the account has not been reconciled for some time, it is possible that the error lies several periods in the past.
• Current period investigation – Evaluate that all transactions are reasonable and appropriate for the period and that no expected transactions are missing. Evaluation of the transactions should be compared to the general ledger detail, not the KFS financial reports.
• Adjustments review – Review all adjusting journal entries recorded in the account within the period for appropriateness and adjust as necessary.
• Reversals review – Ensure all journal entries that should have reversed within the period have been reversed.
• Ending balance review – Steps to reconcile ending balances include:
  • Verifying that the ending detail for the account matches the ending account balance
  • Confirming ending balances reconcile to external source document and subsidiary ledgers/systems
  • Confirming substantiation is on site for all ending balances. When requested, units should be able to provide support for all reconciled balances.

Account Reconciliation Example

System-Generated Object Code

At month end, a fiscal officer is reconciling object code 9045 – Invoices Payable – External System. These entries are automatically generated when invoices are entered into BUY.IU. The fiscal officer follows the following steps to reconcile the account:

• Run the BUY.IU financial report for the most recently closed fiscal period.
• Review the “Summary” tab to confirm balance ties to the balance sheet 9045 balance.
• Review BUY.IU aging detail report and consider the following questions:
  • Are the open invoices valid for this account?
  • Is the account on the open invoice accurate?
  • Are there any outstanding invoices for longer than one month? If so, why isn’t it getting paid?
• For any errors noted during the reconciliation process, contact Procurement Services or UARS for updates.

Non-System-Generated Object Code

At month end, a fiscal officer is reconciling object code 9000 – Accounts Payable. Entries to this object code are entered manually within KFS. The fiscal officer follows the following steps to reconcile the account:

• Run the detail transactions report in IUIE for the most recently closed fiscal period.
• Confirm the ending balance for the object code per the balance sheet ties to the beginning balance plus current period transactions.
• When reviewing the transaction listing, consider the following questions:
  • Are the transactions listed correct (i.e. did I or another person in my unit with fiscal authority create this transaction?)
  • Have all adjustments been made to the object code?
  • Have all reversals occurred for balances that have been paid?
• Ensure all transactions can be substantiated – a few of the most common examples of substantiation for AP include invoices, receipts, and contracts. If there is a transaction that cannot be substantiated, the amount should be written-off.

Requirements and Best Practices

This portion of the standard outlines general requirements and best practices related to performing account reconciliations. Following the requirements and best practices outlined below will allow users to gain a better understanding of their entity’s financial health and help identify errors, mistakes, and pitfalls before they create larger issues.

Requirements

1. The (RC) fiscal officer is responsible for the accuracy, reliability, and completeness of financial statements.
2. The (RC) fiscal officer is responsible for completing all associated account reconciliations for operating accounts on a monthly basis to ensure the accuracy and completeness of accounts.

Best Practices

1. Review the trial balance report to the general ledger to ensure that the debits equal the credits. If the balance of the debit column does not match the credit column, identify the amount of the difference so that you have an idea of how much the discrepancy is.
2. Look at the balance of each account in the trial balance report to ensure that the balance is reasonable. For example, asset accounts should have a debit balance. Liability accounts should have a credit balance. If an account that should have a debit balance has a credit balance or vice versa, pull the activity in that account and evaluate each transaction to find the error.
3. Develop an object code specific template that is best suited to the unit’s function and usage. Use these templates monthly during the reconciliation to ensure consistency throughout the fiscal year.
4. Check the transactions of each account against the journal entry logs for the account. This step ensures there is a record of each transaction, that each one posted correctly, and that the supporting documentation is accurate.
5. Validate the transactions on the bank statement against the cash account in the ledger so that you can be sure that your cash transactions and ledger statements are accurate as well.