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Reconciliation: Everything You Need to Know

Updated: Apr 22

If you are like many nonprofit leaders, when you think about financial reports, you think about your Statement of Activities, also known as the Income Statement, or Profit and Loss. It’s an easy report to focus on, since it tracks the ways money comes in to and flows out of your organization. Your board likes it. They compare it to the Budget and feel like they can tell whether or not your organization is on track.

But if you’ve ever had an audit, you may have noticed that the auditors don’t really spend much time with your income and expense accounts. Sure, they want to know about contributions $5,000 and above, and they’ll pay more attention to restricted or government grants. They’ll make sure your salary expense lines up with your quarterly payroll reports, and they may ask questions when there is a significant variance in any line item year over year.

And then they’ll spend the majority of their time digging in to the details of the accounts that show up on your Statement of Position, or the Balance Sheet. It’s because this is where the rubber hits the road. If the details of these accounts are true, then you can trust the overall financial picture you present to the world.

The top of a statement of financial position

So, what kind of accounts show up on your Statement of Position, and what can you do to make sure the balances are accurate?

  • The Statement of Position is made up of three major types of accounts: assets, liabilities, and net assets (the for-profit world calls that last one “equity”.)

  • Assets are the things you own: bank and investment accounts, receivables, prepaid expenses, and net fixed assets – all of your capital purchases of things like large equipment, land, buildings and building improvements, less any accumulated depreciation.

  • Liabilities are what you owe: payables, credit card and loan balances, deferred revenue such as membership payments for future years or advances on government contracts.

  • Net Assets are what’s left over after you subtract your liabilities from your assets, and come in three (soon to be two) flavors: unrestricted, temporarily restricted, and permanently restricted.

How do you know the amounts shown on the Statement of Position are correct? Just like the auditors, you need to dig in to the details, and you do this by reviewing and reconciling the accounts.

Start with your bank accounts. You probably reconcile these each month when you get the statement from your bank. (If you don’t, you should. You ABSOLUTELY should.) These are easy, because you know exactly what the balance is supposed to be. Every accounting software has a reconciliation feature where you enter the date of the statement and the ending balance, and proceed to check off the deposits and expenses that have cleared until you reach the point where the variance between what you say cleared the bank matches the bank’s record exactly. WHEEE! The difference is ZERO!! But don’t put on your party hat just yet.

While this is very exciting, it is only the first part of the process. You need to pay attention to the things that are in your records but not on the bank statement. WHY have these items not cleared the bank? We had a client a year ago who noticed that none of their Square deposits were showing up on their bank statement. When they did some research, they discovered that their very trusted volunteer Treasurer had changed the routing so that these payments were going to his personal account.

More often when you have uncleared deposits in your account, the issue is that someone failed to follow the processes and income was recorded as both a sales receipt AND a deposit. Or PayPal deposits were recorded directly to the bank account, even though they are actually still out with PayPal and haven’t been transferred down yet.

If cash deposits haven’t cleared, it may be a matter of timing. The deposit was recorded on the day the money came in to the organization, but it really sits in a drawer somewhere until someone goes to the bank on Friday.

You will find similar questions when you review your expenses. Are there checks that haven’t cleared? Follow up with those vendors to find out what has happened to the checks, and encourage them to get them to the bank. Ask questions about uncleared debit card or ACH transactions. These will typically clear within a day or two, so if they haven’t you need to get curious. Often, the transaction has been entered twice, overstating your expenses. Don’t let these hang out there month after month. Figure out what is going on and take action to clean them up.

You also want to look for anything unusual. Was the rent paid twice? Are there large checks to vendors you don’t remember working with, or to members of the staff? You will typically spend about the same amount on the same things each month, unless you have special activity. Look for anything you don’t understand.

This is why the person in charge of cutting checks and making deposits should NOT be the person who does the reconciliation. (If they must, because your organization is very small, set up a process where the bank statements are reviewed monthly by the Treasurer or another member of the board.)

The goal is to be very clear on what has actually run through your bank account, and to know why transactions have yet to show up on your statement.

You should START by reconciling your bank accounts, but you shouldn’t stop there. On a monthly basis, you should review the details of your other accounts as well.

Run an Open Invoices report to see what makes up that balance.  If you aren’t doing this regularly, you may be shocked by what you find. All too often, invoices are entered when we receive a promise or a grant agreement letter, but treated as new money when the check arrives. This means that you have double counted your income, and the picture painted by your Statement of Activities is not as rosy as you thought. Other times you may find that you have forgotten to create a receivable for the future portion of a multi-year grant, and by realizing it, you increase your income. You want the balance in this account to accurately reflect all of the money that is owed to you.

Run an Unpaid Bills report. The situation here is often much like what we just saw with the receivables. Someone entered a bill, and later wrote a check for the same thing, doubling the expense. Or the organization has incurred expenses but not yet received a bill; that should still be reflected in your Unpaid Bills Report.

Dig into your Prepaid Expenses. Often this is a gigantic pile of goo that no one has looked at in forever. To start, you will need to determine how much of the total is associated with each vendor. How often are these things expensed? If you review and expense items monthly, you can keep a running total for each vendor and take them off your list when the balance gets to zero. If you are using a software like QuickBooks, you can actually use the Reconciliation tool to clear transactions once the amount for a vendor is fully expensed. If you do this, the ending balance for your reconciliation will always be zero, because you will only be checking off items when they are completed moved out of the account.

Review your Deferred Revenue, keeping a list on specifically what is going in to this account and when it is coming out. You can do this in your software or in an outside schedule. Note that only Earned Revenue can be deferred – next year’s tuition or season tickets, advances on government contracts. This is NOT the place to put the restricted portions of grants; that has to be counted as income when you first find out about it.

Maintain a listing of your fixed assets, noting when they were purchased, the initial cost, and the expected life span. This will allow you to calculate and take depreciation, whether monthly, quarterly or at year end. Many auditors prefer to help you with this calculation, but you will make everyone’s like easier if you keep a record of items you purchase or dispose of.

It is up to you to take the time to review the details of your balance sheets accounts on a regular basis, making sure that you have properly accounted for all of your expenses and any money owed to you. Cleaning up old, uncleared amounts in your bank accounts will make it easier for you to REALLY know how much money you’ve got in the bank. Paying attention to those other niggling accounts, essentially keeping your books Audit Ready all year long, will make your year-end process a dream. And when you can trust your Statement of Position, you can take pride in presenting your Budget vs Actual Statement of Activities to your Board, knowing that it truly reflects whether or not your organization is on track.

This post was originally written for QuickBooks Made Easy and published on the NeonCRM blog and High Rock Accounting.

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