Balance Sheet Reconciliation
Contact: University Accountant
Typically, accounting transactions for campus entities are recorded to revenue and expense accounts. These entries adjust balances on the Budget/Expense Summary reports. Every campus entity also has a Balance Sheet. The balance sheet lists assets (claim on cash, prepaids, receivables, inventory, etc.) and liabilities (accrued liabilities, payroll and taxes payable, notes payable, deferred revenue, etc). Many campus entities record transactions to balance sheet accounts and are therefore responsible to know what activity is occurring and to assure proper classification for those transactions. Even departments that do not make such entries should occasionally look at their balance sheet to make sure a miscoded entry has not been recorded to their accounts.
Reconciliation of Balance Sheet Accounts
What does it mean to “reconcile” an account? Not all accounts are created equal. For some accounts, reconciliation means “agree the balance on the monthly BOb financial reports to a supporting system.” (A “ supporting or subsidiary system” is a non-PeopleSoft system that is used internally by the department to keep track of transactions. It can be anything from a simple handwritten list or Excel spreadsheet to a Quicken-type program or even a larger system). In other cases, reconciliation means “provide a list of transactions that make up the balance and assure that all the transactions have been properly classified.” A more detailed explanation of the various types of accounts is provided below.
Financial Services Reconciliation Responsibility
Not all balance sheet accounts are controlled and reconciled by campus departments. Certain university balance sheet accounts are reviewed and reconciled regularly by Financial Services personnel. Campus entities are not responsible for reconciling these university accounts, as opposed to department accounts.
For assets these include:
- University Bank Accounts
- University Receivables
- Pledges & Trusts Receivable
- Land, Buildings and Equipment
- Gifts-in-kind, held for Liquidation
For liabilities these include:
- Accounts Payable
- Accrued Payroll
- Accrued Liabilities (Recorded by Financial Services)
- Accrued Vacation & Benefits
- Taxes Payable
- Loans and Notes Payable
Campus Controller Reconciliation Responsibility
Campus controllers are responsible to assure reconciliation of other balance sheet accounts. Discussion of each type and appropriate means for reconciling follows:
Department Bank Accounts, 10xx (allowed only as approved by Treasury Services) — Agree to another system
Certain departments maintain bank accounts to facilitate distant operations (e.g. Study abroad, Jerusalem Center.) A traditional bank reconciliation performed monthly will reconcile the balance per the general ledger to the balance per bank. Reconciling items typically include: deposits in transit at month end, bank fees not recorded on the general ledger, and outstanding checks not yet recorded by the bank.
Department Receivables, 12xx—Agree to another system
Certain departments do not utilize the central university receivables system. Where departments maintain their own receivables from customers, reconciliation of the general ledger balance will entail agreement to their supporting listing of customer invoice balances.
Inventories, 13xx—Agree to another system
Certain areas maintain inventories for sale as part of their business operations. Recording of inventories on the balance sheet is not encouraged unless the inventory value is in excess of $50,000. Records supporting inventory balances vary. Some areas have perpetual inventory systems that accurately support the general ledger balance. Others make estimated adjustments to the inventory based upon a percentage of sales activity and then periodically adjust the general ledger balance to actual by physically counting and pricing the inventory on hand at a particular date (at least annually.) Reconciliation of the inventory balance requires agreement of the general ledger balance to the supporting perpetual inventory system or agreement to the priced physical count of inventory, which will occur at least annually. Physical count of inventories almost always results in minor adjustments to the balance in the general ledger.
Prepaid Expenses and Other Assets, 14xx—Explain the balance by providing list of transactions, assure continued proper classification
To simplify accounting in academic areas, most campus departments will record items to expense as they are purchased. For areas such as Auxiliaries that need to match revenue to expense for income statement presentation purposes, items purchased in advance of use may be classified as a prepaid expense. In these cases, it is proper to record these “prepaid expenses” as an asset until the items are to be used. At that later time the prepaid expenses are then removed from assets and recorded to the income statement as an expense to match with the period of use.
Areas recording prepaid expenses will reconcile the balance in that account by listing the vendor, vendor invoice number and amount that add up to the balance. The reconciler should be assured that the benefit of those items has not already been received (in which case the amount should be expensed.)
Any balances recorded as “other assets” should be identified similarly to prepaid expenses noted above.
Clearing Accounts, 18xx series—Explain the balance by providing list of transactions, assure continued proper classification
Certain campus areas use clearing accounts to facilitate the recording of revenue and expense. For example, one system will record a debit to a clearing account that is to be matched by a later companion entry that credits the clearing account and re-distributes the debit to other accounts. Clearing accounts should net to zero except for the timing difference while waiting for the companion entry to be made, usually within one month of the original transaction. Reconciliation of clearing accounts will identify the pending transactions and when they will be made.
Accrued Liabilities (Recorded by campus departments), 22xx—Explain the balance by providing list of transactions, assure continued proper classification
Accrued Liabilities occur when goods or services have been received, but the vendor has not invoiced the University. Because the benefit has been received, an expense is necessary and a credit to accrued liabilities offsets that expense. At the time the vendor does invoice for goods or services the invoice will generate a new entry to expense with a credit to Accounts Payable.
Thus when the invoice is recorded the original Accrued Liability/Expense entry should be reversed. For example:
Goods received from vendor in May but vendor does not invoice in May
Vendor invoice in June
Reverse accrual pursuant to late vendor invoice
Reconciliation of the accrued liabilities balance in the general ledger will identify specific vendor transactions and amounts and when the vendor invoice is expected to be received and recorded via the Accounts Payable entry (indicating when the accrual is expected to be reversed.)
Deposits Due to Others, 23xx (excluding Agency Fund 47 and account 2300) — Explain the balance by providing list of transactions, assure continued proper classification
Occasionally, some campus areas will receive deposits that are to be returned to the depositor. Reconciliation procedures would list the depositor, date, amount, and when the deposit is expected to be returned to the depositor.
Fund 47 Agency operating units with activity in account 2300 do not require reconciliation since this is simply a summation of their cash activity which is evaluated through the bank reconciliation for Agency funds as a whole. Responsible managers of Fund 47 Agency operating units are however cautioned to carefully review activity noted on their monthly financial statement to assure the propriety of transactions.
Deferred Revenue, 26xx—Explain the balance by providing list of transactions, assure continued proper classification
In some cases, customers pre-pay for goods or services. When this occurs, the payment should be recorded as deferred revenue (debit cash, credit deferred revenue). When services or products are provided, the deferred revenue should be reclassified to revenue on the income statement (debit deferred revenue, credit revenue). Proper reconciliation of the general ledger balance would include a detail list (that matches the general ledger balance) of customers, payment dates and when the product or service pre-payments are expected to be adjusted to revenue.
A few words regarding Class codes – when eliminating or reversing balance sheet transactions it is important the Class code is the same as the originating entry. Otherwise there will be two lines on the Balance Sheet Summary report – one showing the original transaction and another showing the elimination or reversal. While it is true the four digit account code balance may net to zero, the two lines on the report with different Class codes will continue to carry forward year- after-year.
In addition to this Balance Sheet Reconciliation Guide, there are at least 3 other tools that can be used to help reconcile Balance Sheet accounts:
- BOb Balance Sheet Reconciliation Balances Query – navigation: Public Folders > Financial System Information > Reconciliation Support. The query prompts for Fiscal Year and Accounting Period. It returns balance sheet account balances for operating units you have been assigned as the manager or contact person or have been delegated rights. It will only show the balance sheet account balances campus departments are required to control and reconcile.
- BOb Transaction Queries – navigation: > Public Folders > Financial System Information > Transactions. There are several queries in this folder that will allow you to see the details that make up the balance in the accounts
- Balance Sheet Reconciliation Template – This simple format can be used when reconciling most accounts.
Regular reconciliation of balance sheet accounts will assure transactions are recorded properly to asset, liability, revenue, and expense accounts. Reconciliation of balance sheet accounts is recommended monthly or quarterly. Copies of August and December reconciliations should be sent to Financial Services (C-249 ASB) by the end of the following month (Sept 30 and Jan 31) for review and to provide support for the external auditors. If you have additional questions, please contact your University Accountant, or Paul Larsen (Designated and Restricted Accountant.)