Nonprofit Accounting Tips: Reconciling Bank Statements

 

nonprofit accountingWhile it is critical to the running a nonprofit organization, many people dread the nonprofit accounting process, particularly bank statement reconciliation. In nonprofit accounting, reconciling bank statements ranks high on the list of procrastination but it doesn’t have to be that way.

Ideally, reconciling the bank statement is a task accomplished through specialized nonprofit accounting software; however, understanding the underlying principles will lead to more accurate transaction entries and a bank reconciliation process that might ease the tension in your shoulders and make the nonprofit accounting process a little bit easier.

Reconciling the bank statement is simply comparing your organization’s cash records to the monthly statement provided by the bank. Your cash records, also known as your cash general ledger or GL, contain a list of all your cash transactions during the month. The deposits to the bank will be debits to your cash general ledger account. The checks will be credits to the cash general ledger. Bank service fees and check fees are some other cash withdrawal items and should be entered as credits to the cash account.

In a perfect world, the differences between the cash general ledger and the bank statement should be mostly timing differences.  For example: an outstanding check written on December 31 will be a December transaction reflected in the cash GL, but may not appear on the bank statement until January, resulting in a timing difference between the cash GL and the bank statement.

Deposits taken to the bank at 5:00 p.m. on December 31 will be listed on the cash GL as a December transaction but will most likely not be listed on the bank statement until January. This is known as a deposit in transit. This is also a timing difference between the cash GL and the bank statement.

Nonprofit Accounting: Steps to Reconciling the Bank Statement

  1. Start with the balance on the bank statement.
  2. Obtain the cash balance from the general ledger.
  3. Compare the adjusted totals. They should be the same. If not, identify the differences so that corrections and adjustments may be entered into the correct place.
  4. Finally, prepare the appropriate journals for the corrections and adjustments. A good rule is to enter the item where it is missing. For example, interest that appears on the bank statement will need to be entered in the cash general ledger. Deposits in transit or outstanding checks are simply noted as an adjustment to the bank balance. Those items will appear on the next statement but will already be included in the cash balance.

Now that you’ve gone through the reconciliation process, check to make sure that the balances are the same. If you have different balances, make sure that you have done the following before moving on to the next steps:

  • Listed your bank balance and identified the deposits in transit and outstanding checks
  • Identified any bank errors
  • Listed your cash general ledger balance for the same ending date as the bank statement
  • Identified bank service charges and fees and any interest paid by the bank on the account

If your balances are still different, something is missing. Something is either in the cash balance and not on the bank statement or on the bank statement and not in the cash balance.

Ideally, your nonprofit accounting solution should have reports available to assist with analysis. Cash journals, check registers, and reports that list all checks, deposits, and other cash items are useful in tracking down the offending items. The ability to filter reports to see only outstanding checks or deposits as of a certain date is a handy feature in nonprofit accounting.  For your follow up “reconciliation review” be sure and:

  1. Identify missing checks. Is a cleared check missing from the cash general ledger? Determine if the check is incorrectly dated in your system, perhaps with a date earlier or later than the month you are reconciling. Perhaps a check needs to be voided?
  2. Identify missing deposits. Does the bank list a deposit not on the cash general ledger? Does the cash general ledger list a deposit not on the bank statement? Identify the deposit and determine the correct steps.
  3. Identify journals or other transactions entered to cash and not reflected on the bank statement. The reason for these entries will determine your next step: is there an error? Does a correcting journal need to be prepared and entered?
  4. Look for bank errors. Yes, they happen. Some banks still enter check amounts manually! Look for checks or deposit amounts that vary from your records.

Next, examine the list of adjusting entries.  Are the outstanding checks old? Do you need to void or reissue any checks? Are missing deposits simply timing issues or do you need to develop a policy to handle cash transactions in a timely manner? Are employees cashing payroll checks in a timely manner? Would implementing direct deposit create a more efficient process, saving time and preventing lost checks?

Bank reconciliation is an important step in the nonprofit accounting process. Regardless of the nonprofit accounting system you use, regular and routine bank reconciliation will keep your nonprofit accounting records accurate and will keep your board and donors happy.