How can I know for sure what’s in the bank? The bank statement isn’t the same as my books…

It’s typical for the bank statement to show a different month-end balance from your general ledger.

Now that online access to banking records is so prevalent, it’s easier to keep track of the differences. However, they still exist, and you need to understand why.

For one thing, you need to pick up bank charges and any interest earned. For another, there may be errors to deal with – yours or the bank’s – which must be identified and corrected by comparing the two sets of records. Finally – and most significantly – there are timing differences between when you initiate a transaction and when the bank sees it.

Your books record payments and deposits in the order in which you issue them. The bank’s records will also contain these amounts – but in the order in which they were presented at the bank. That might be quite a different thing!

Let’s say you issued a batch of cheques dated on the 25th of the month. Getting them signed and into the mail took a couple of days. Some payees may have received and banked their cheques before the 30th, but others won’t cash them till the new month. As far as your books are concerned, these cheques are all current month items – but from the bank’s point of view, some belong to this month and some to next.

Therefore, at the end of this month, the bank will have a higher balance than your books, because the bank doesn’t know what cheques may be in transit.

As this example demonstrates, it’s very important for you to keep your bookkeeping up to date, and use your balance rather than the bank’s. Once you’ve issued a payment, you need to assume the money is gone, even if it hasn’t cleared from your account. You don’t want to try spending the same money twice!

The same problem can happen with other transactions. The deposit you made at the ATM on Friday may not be processed by the bank until Monday. The online purchase you made, or the online donation that a supporter made from their home may be logged on your system today, but may not arrive in the bank’s records until tomorrow.

The tool that you need to understand is the bank reconciliation. It is the document that proves your bookkeeper has compared your general ledger to the bank statement, and identified all problems and timing differences to the penny. If you put your general ledger at your right hand, the bank statement at your left hand, and the bank rec document in the middle, you should be able to see your balance, the bank’s balance, and an itemized explanation of any differences.

How can I tell whether my accounting reports are correct?

This can be a perplexing question when you’re relying on the services of bookkeepers and accountants, but you don’t entirely understand what they do.

Here are a few ideas that may help:

Revenue and expense allocations are pretty much up to you, the manager. Do you want a single expense account for Salaries? That’s entirely correct. Would you prefer to have a separate expense account for each salaried position? That’s also correct. Do you want one account for Office Overhead? Not a problem. Would you prefer to have a series of accounts to distinguish amongst various supplies, phone, insurance, etc.? Also entirely acceptable.

Management (perhaps with input as appropriate from your Treasurer, Board, accountant, bookkeeper, staff) needs to decide what level of detail works best for your organization’s situation. Once you’ve established a set of revenue and expense accounts, it’s important to confirm on a regular basis that transactions are being allocated to the right place. Many accounting software packages provide detailed reports that allow you quite easily to scan the contents of these accounts for misplaced items.

Your cash resources – contained in your bank and investment accounts – are the lifeblood of your organization. It’s important to know how much money is readily available to your day to day operations. See our FAQ on how to tell for sure what’s in the bank.

Knowing who owes you money, how much, and since when, is very important. Most accounting software will produce a “customer aging” report that contains this information. (See the glossary for a definition.)

In the same way, you need to be able to review your list of payables, itemizing the suppliers to whom you owe money, how much and since when. On most software, a “vendor aging” report provides this detail.

Beyond that, if your bookkeeper is on their game, they will be able to provide an explanation of the contents of each account, and to pull out documentation from the files that substantiates the amounts. If your organization is audited, your chartered accountant will also be able to provide these explanations, as at your fiscal year-end. If these folks can’t provide a satisfying explanation, you need to challenge them! They should be able to help you understand your accounts, and justify that each balance is properly stated.