reconciliation

name

reconciliation

description

Contains verified tolerance thresholds ($5/$50 write-off rules), brokerage external-vs-internal flow isolation procedures, and the Schedule L deposit-derivation prohibition that produce more precise answers than general training alone. Bank rec, CC liability matching, stale-check escalation, rewards accounting, error heuristics, outstanding check aging. Consult when reconciling any account or asking "why doesn't my balance match."

Reconciliation

Operational skill for matching GL balances to external statements across bank, credit card, and investment accounts. Reconciliation is a prerequisite to monthly close and the primary control against undetected errors, fraud, and timing mismatches.

Prerequisite: All transactions for the period must be recorded before reconciling. Invoke bookkeeping:transaction-processing if the GL is not current.

Core Principle

Two balances start different and must end identical. The reconciliation classifies every difference as either a timing item (resolves naturally) or an adjusting item (requires a journal entry). When both adjusted balances agree, the reconciliation is complete.

Adjusted External Balance = Statement Ending Balance +/- Timing Items +/- External Errors
Adjusted Book Balance     = GL Ending Balance +/- Unrecorded Items +/- Book Errors
Both must be equal.

Frequency Guidelines

• Standard accounts: monthly, tied to statement date
• High-volume bank accounts (>200 txns/month): weekly
• Fraud-risk accounts: daily
• Credit cards: reconcile to statement date (rarely month-end aligned)
• Investment accounts: quarterly minimum; monthly when active trading occurs

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Bank Account Reconciliation

Reconciling Items Taxonomy

Adjustments to bank balance (in books, not yet on statement):

• Outstanding checks -- issued and recorded but not cleared. Normal if <90 days.
• Deposits in transit -- recorded near cutoff, not yet credited. Should clear in 1-2 business days.
• Bank errors -- incorrect amounts, duplicates, wrong-account postings by the bank.

Adjustments to book balance (on statement, not yet in books):

• Bank service charges, wire fees, NSF charges, overdraft fees -- record as bank charges expense
• Interest earned -- record as interest income
• Direct debits / ACH withdrawals -- auto-payments not yet recorded
• NSF (returned) checks -- reverse original deposit, re-debit customer receivable
• Wire transfers received -- inbound wires not yet in GL
• Book errors -- transpositions, duplicates, omissions, misclassifications

Procedure

1. Gather bank statement, prior month rec, GL cash detail for the period
2. Start with bank statement ending balance
3. Add deposits in transit; subtract outstanding checks; adjust for bank errors
4. Compute adjusted bank balance
5. Start with GL ending balance
6. Add bank credits not in books (interest, inbound wires); subtract bank debits not in books (fees, NSF, ACH)
7. Correct any book errors discovered
8. Compute adjusted book balance
9. Verify agreement -- if not zero, return to step 3
10. Post adjusting entries for all book-side items (steps 6-7) dated as of statement date
11. Preparer signs; reviewer (different person) signs -- segregation of duties required

Error Detection Heuristics

• Divisible by 9 -- transposition error (e.g., $54 recorded as $45)
• Divisible by 2 -- possible debit/credit reversal
• Equals a round number -- likely an omitted transaction
• Equals an existing transaction -- check for duplicates or omissions

Stale-Dated Checks

Outstanding check aging triggers escalating action:

• 1 month: normal, carry forward
• 2 months: follow up with payee, document attempt
• 90-180 days: contact payee; void and reissue if lost. Banks may refuse checks >6 months (UCC 4-404).
• State escheatment: payroll checks subject to unclaimed property laws (1-3 year holding periods vary by state). If payee unreachable, void check, credit original expense/AP, and remit to state per reporting schedule.

Timing Differences

Timing differences are normal and do not require correcting entries. Track month-over-month:

• Outstanding checks carrying forward multiple months warrant investigation
• Deposits in transit >1 week suggest recording error or lost deposit
• ACH initiated on last business day may not settle until next month

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Credit Card Reconciliation

Key Differences from Bank Rec

• Balance direction: CC balance is a liability (credit normal). Positive statement balance = company owes.
• Statement date: rarely aligns with calendar month-end. Always reconcile to statement date.
• Timing items: instead of outstanding checks, the typical item is charges made after statement close but already in the books.
• Payments: reduce the liability. Credits on statement, debits in GL.

Procedure

1. Gather CC statement, prior rec, GL detail for the CC liability account
2. Verify opening balance matches prior rec closing
3. Match charges, credits (returns/refunds/rewards), and payments between statement and GL
4. Identify unmatched items: on statement but not in GL (record them); in GL but not on statement (outstanding)
5. Post adjusting entries for interest, fees, rewards, unrecorded transactions
6. Verify: Adjusted GL Balance = Statement Ending Balance + Outstanding Charges - Outstanding Credits/Payments
7. Preparer and reviewer sign off

Multi-Card Setup

Create one GL account per physical card (VISA - 4455, AMEX - 1001) under a parent "Credit Cards" group account. Combined single-account approaches make clean reconciliation impossible when multiple statements must split one GL balance.

Invoke accounting-foundation:chart-of-accounts for account numbering (2200s range for credit cards/short-term notes).

Cash-Back Rewards Accounting

• <$500/year: credit the original expense category (simpler)
• >=$500/year: credit Other Income: Credit Card Rewards (preserves gross expenses for budgeting)

Statement credits: DR Credit Card Liability, CR Rewards account. Direct deposits: DR Bank, CR Rewards account.

Interest, Fees, and Special Items

• Interest/finance charges: Interest Expense (deductible for C-corps)
• Annual fee: Bank Fees or Office Expense
• Late payment fee: Bank Fees (deductible but avoidable -- flag for review)
• Foreign transaction fee: 1-3% of USD amount; Bank Fees or combine with transaction if immaterial
• Cash advance fee: Interest Expense (flag -- typically higher rate)
• Employee personal charges: record as Employee Advance (receivable); collect repayment within 30 days. Never expense.
• Disputed charges: leave at original amount; adjust when issuer resolves. Track in memo.

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Investment Account Reconciliation

The Core Distinction: External vs Internal Activity

A brokerage account has two types of activity. Only external flows generate cash-movement journal entries. The reconciliation must isolate them.

External cash flows (money crossing the bank-brokerage boundary):

• Wire transfers in/out, check deposits, ACH transfers
• These require JEs between the bank and investment GL accounts

Internal activity (movement within the brokerage):

• Buying/selling securities (cash to shares and back, inside the brokerage)
• Dividends credited to brokerage cash balance
• Interest earned, foreign tax withheld
• Market appreciation/depreciation

Critical error to avoid: When Schedule L shows investments increasing from $X to $Y, do NOT assume the difference represents cash deposits. Stock portfolios grow through market appreciation. A $60K increase on Schedule L may represent $0 in actual deposits.

Reading Brokerage Statements

Every broker formats statements differently, but the task is always the same: find the section that shows cash movements with the outside world — actual deposits and withdrawals that crossed the bank-brokerage boundary.

What to look for: A section labeled Deposits, Wire Transfers, Journal Entries, Cash Activity, or similar. Some brokers pre-separate deposits from internal activity on the summary page; others lump deposits with sale proceeds under labels like "Other Credits."

Common trap: Activity summaries that combine external deposits with internal sale proceeds into a single line. When a summary shows large credits, always drill into the transaction detail to isolate actual deposits from buy/sell activity.

Statement types: Monthly statements with YTD columns give the cleanest data — one line for annual deposits. Annual-only statements require scanning transaction detail and filtering by transfer keywords (wires, check deposits, ACH) vs internal keywords (bought, sold, dividend, interest).

Self-Reconciliation

Verify the running balance or cash flow equation ties: opening_balance + all_transaction_amounts = closing_balance

If it does not tie, transactions are missing or OCR errors exist. The PDF is authoritative over OCR metadata.

Schedule L Comparison

Schedule L Line 6 may carry market value, cost basis, or a hybrid. The CPA may change methodology between years, creating apparent balance changes that are valuation reclassifications, not cash movements.

Correct approach:

1. Determine external deposits/withdrawals from the brokerage statement
2. Determine portfolio market value from the brokerage statement (opening and closing)
3. Compare Schedule L to brokerage market value
4. If they match: straightforward, Schedule L is at market value
5. If they differ: flag as valuation methodology difference -- investigate, do not plug
6. Never work backwards from Schedule L to infer deposits

Journal Entries

External cash transfers (evidence-based deposit total > 0):

DR  Brokerage Investments    {deposit amount}
  CR  Checking               {deposit amount}

Zero deposits (evidence-based): no cash transfer JE. Do not create one.

Dividends, capital gains, interest, foreign tax: standard income/expense JEs within brokerage accounts -- do not touch operating cash.

Market value adjustment: DR/CR Investments and AOCI for unrealized gain/loss changes.

Red Flags

• Schedule L investment grew but brokerage shows zero deposits: normal (market appreciation)
• Activity Summary "Other Credits" is large: normal (includes sale proceeds)
• Schedule L BOY does not equal prior year brokerage EOY market value: valuation methodology difference
• 1099-DIV shows $0 but brokerage shows dividends: check Income Summary Statement vs reported-to-IRS version
• Only annual Account Summary available (no monthly statements): cannot determine deposits -- flag as blocking gap

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Decision Logic

Tolerance Thresholds

• Difference <$5: write off to bank charges (debit) or miscellaneous income (credit). Document in rec workpaper.
• Difference $5-$50: investigate one pass. Write off with preparer + reviewer approval if unresolved.
• Difference >$50: must resolve. Do not close the reconciliation until explained.

Situational Decisions

• Prior-month outstanding item cleared at different amount: adjust the book entry for the difference. Common with estimated accruals.
• Bank error identified: adjust bank side of rec; notify bank in writing; retain written confirmation.
• CC card has no bank feed: enter manually from statement; consider switching cards.
• Brokerage data unavailable: flag as blocking gap. Do not derive deposits from Schedule L arithmetic.

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Documentation Requirements

Every reconciliation must include:

• Period covered and statement date
• Beginning and ending balances from both external statement and GL
• Complete list of reconciling items with descriptions, dates, amounts, and reference numbers
• Adjusted balances showing agreement
• Preparer name and date
• Reviewer name and date (must be a different person)
• Supporting evidence for adjusting entries

Retention: 7 years minimum (IRS fraud statute of limitations; 3 years for standard returns).

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Platform Execution

For platform-specific reconciliation workflows, bank feed management, matching rules, and UI navigation, invoke the relevant accounting system integration skill:

• qbo-integration:qbo-bookkeeping for QuickBooks Online
• qbo-integration:qbo-api for programmatic reconciliation and bank feed API patterns

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Supporting References

Read these for deeper detail on specific topics. Each file is the authoritative source for its domain; the synthesized content above covers the operational essentials.

• references/bank-reconciliation.md -- Full bank reconciliation procedure with step-by-step walkthrough, reconciling items taxonomy with examples, error detection heuristics, stale-check rules with UCC/escheatment citations, and decision matrix for unexplained differences. Read when handling edge cases in bank rec or when you need the complete procedure checklist.

• references/credit-card-reconciliation.md -- CC-specific reconciliation procedure, rewards accounting methods with dollar thresholds, interest/fee classification, multi-card GL setup, employee personal charge handling, and disputed charge tracking. Read when setting up CC reconciliation for a new card or resolving CC-specific discrepancies.

• references/investment-account-reconciliation.md -- Brokerage statement reading patterns, external-vs-internal flow isolation method, Schedule L comparison logic, valuation methodology detection, discovery/assessment/reconstruction stage guidance, and red flag patterns. Read when reconciling investment accounts or when Schedule L balance changes need investigation.

Cross-Plugin References

• Invoke accounting-foundation:chart-of-accounts for account classification, numbering conventions, and GL account setup for cash, CC liability, and investment accounts
• Invoke qbo-integration:qbo-bookkeeping for QBO-specific reconciliation workflows, bank feed management, and matching rules
• Invoke qbo-integration:qbo-api for programmatic reconciliation and bank feed API patterns
• Invoke bookkeeping:transaction-processing as a prerequisite -- all transactions must be recorded before reconciling

Cross-Plugin Consumers

• bookkeeping:monthly-close -- reconciliation is a close prerequisite; feeds the close checklist
• bookkeeping:review -- reconciliation workpapers are a primary review artifact
• tax-prep:form-1120-prep -- investment account reconciliation informs Schedule L reporting