A good bookkeeper will at least periodically, and perhaps frequently, reconcile various accounts in the bookkeeping system. A primary purpose is to prove (as far as possible) that everything is in order or, if mistakes have been made, to identify them and correct them. Reconciliations may help deter or reduce the consequences of fraud, and will please the auditors.
Reconciliations are particularly important at the balance sheet date as a step in preparing the accounts.
The following are among the reconciliations that should be considered:
- The total of the sales ledger accounts should be reconciled with the sales ledger control account.
- The total of the purchase ledger accounts should be reconciled with the purchase ledger control account.
- The existence of the fixed assets should be verified and checked against the fixed asset accounts in the nominal ledger.
- Stock should be checked and agreed with the stock accounts in the nominal ledger.
- The corporation tax account should be reconciled. The corporation tax entries are normally made before the tax payable has been agreed with HMRC and sometimes more than one year may be ‘open’. In any case, payments will be made at various dates. The agreed amounts owing (or the latest best estimates) should be reconciled with the corporation tax account in the nominal ledger
Other possibilities include reconciliations relating to PAVE and national insurance, and also to VAT.
Important as the reconciliations are, it should not be forgotten that they will not necessarily reveal all types of mistakes. Compensating errors and a figure debited or credited to a wrong account (such as A. Smith Ltd instead of E. Smith Ltd, both in the sales ledger) are particularly hard to find.
Finally mention should be made of our old friend the suspense account. Nearly all bookkeeping systems have one of these and various things are debited or credited to it for a variety of reasons. Just one of numerous possibilities is a lack of information about a cheque that has been banked. In order to complete the double entry the suspense account would be credited pending an investigation.
It is sometimes claimed that computerised systems cut down the number of entries in the suspense account and make it impossible for the total of the debits not to equal the total of the credits. This last claim is certainly true, but you are still advised to be cautious and reconcile thoroughly.
Some computerized systems will accept entries that do not balance, and achieve balance by putting the difference into
a suspense account. Remember the adage GIGO, which stands for ‘Garbage In Garbage Out’. Suspense accounts should be regularly reconciled, and the component entries identified and investigated. By definition a suspense account is only a temporary home, so the constituent parts must be journaled out to their final and rightful home.