3.1 Accounting Principles and Internal Controls
3.1.9 Bank Reconciliations
The purpose of a bank reconciliation is to compare cash and investment balances and activity (also known as a “proof of cash”) according to the bank to the government’s accounting records and reconcile or follow up on any differences.
Depending on the government’s organization, the bank reconciliation process may be done in stages or parts. For example, separate reconciliations may be done on different schedules or by different people for checking accounts, investment accounts or zero balance accounts, which are later aggregated as part of a global reconciliation.
Bank reconciliations are a necessary control to safeguard cash against fraud and losses and to ensure the accuracy of accounting records. Reconciliation of cash activity is necessary to demonstrate that activity is valid and to safeguard against certain types of fraud. A global reconciliation is necessary to effectively compare and reconcile bank accounts to accounting records since individual bank accounts do not normally correspond exactly to individual cash accounts in the accounting records. It also demonstrates the completeness of the reconciliation by showing that all bank accounts and all cash accounts in the accounting records are able to be compared.
In this section, “cash” is inclusive of cash and investments. “Bank accounts” and “bank reconciliations” are likewise inclusive of investment accounts (such as certificates of deposit and bonds), zero-balance accounts (such as clearing accounts described in BARS 3.8.6 and transmittal accounts described in BARS 3.6.1) and accounts kept by fiscal agents. For governments that use the County as their treasurer, bank reconciliations would refer to the reconciliation of the government’s accounting records to the county treasurer’s report.
Accounting records typically track cash by fund and classification. This does not normally result in a one-for-one relationship between bank accounts and general ledger accounts. In absence of specific legal or contractual requirements, is it not necessary for governments to use separate bank accounts to segregate funds so long as accounting records separately track cash balances by fund in sufficient detail.
Money receipted by fiduciaries or third party vendors on behalf of the government should be considered a cash receipt for the government as described in BARS 188.8.131.52. If such deposits are remitted to the government, they may need to be identified as a deposit in transit on the bank reconciliation. If the government’s funds are receipted and held by others in a fiduciary capacity, the report from the fiscal agent may need to be treated similar to a bank or county treasurer account during the bank reconciliation process.
Imprest and petty cash funds should be recorded at their authorized amounts as described in BARS 3.8.7. Since these accounts are subject to separate monthly controls, the authorized balance is typically used as a reconciling item between accounting records and bank accounts.
Funds should not have a negative cash balance in the accounting records. Any negative cash balance in the accounting records should be resolved with an interfund loan as described in BARS 3.9.1.
Governments must document a global bank reconciliation that includes reconciliation of both the ending balance of cash as well as cash activity at least monthly.
A global bank reconciliation consists of:
- Compiling the ending balance, receipts and deposits for the month across all bank statements. This will normally be done by creating a schedule to summarize (or series of schedules that are then aggregated, if the reconciliation is done in parts or stages).
- Compiling the ending balance, additions and deductions for the month for all cash accounts in the accounting records. This will normally be done by running a report from the accounting system.
- Identifying reconciling items for differences between bank receipts, deposits and ending balance and the corresponding accounting record revenues, expenditures and ending balance. Reconciling items could include any of the following items:
a. Timing differences between when a transaction is recorded in the accounting records and when it affects the bank account. For example, some of these reconciling items would include deposits in transit, outstanding items or open period items.
b. Bank activity that is not recorded in the accounting records. For example, some of these reconciling items would include transfers between bank accounts or transactions that are netted when recorded in the accounting records.
c. Reportable activity recorded in the accounting records that is not a receipt or deposit in the bank records. For example, some of these reconciling items would include interfund transfers, loans or taxes, internal service fund charges, or the difference between gross and net amounts from offsetting agreements.
- Identifying transactions from the bank accounts need to be recorded in the accounting records. For example, some of these items could include interest earned, bank fees or charges, NSF checks, and unrecorded deposits (such as lockbox transactions, EFTs, or other electronic deposits made directly into the bank account by outside parties).
Accounting records should be updated for all such transactions identified in the bank statements. Unrecorded deposits should be investigated and recorded. If unknown at the time of the reconciliation, they should be recorded to a suspense fund until they can be investigated and resolved as described in BARS 3.6.11.
- Following up on any unreconciled differences. After adjusting for reconciliations, there should be no further differences between bank statements and accounting records. If there are, research should be performed to determine the cause of the differences – that is, what bank or accounting record transaction is the source of the difference and what does it represent. If it is an error in the accounting records, it should be corrected. If it is a bank error, it should be communicated and resolved with the bank.
Governments should consider more frequent reconciliations, such as daily reconciliations for accounts with a large amount of activity or that are at higher risk for fraud or invalid payments, such as the main checking account for a larger government.
SAO does not prescribe how governments might organize their bank accounts or the corresponding accounting records. However, the number and type of accounts, banking practices, organization of accounting records, and the methods, division and stages of reconciliation established by the government should not represent a barrier to effective control.