SBM Reconciling and Closing Accounts

Administrative Data SBM Reconciling and Closing Accounts Course Information Course Title - SBM Reconciling and Closing Accounts Number - SBMT2135 Total Credits - 2 Course Description Units This course will focus on the reconciliation of various accounts found within the balance sheet and how to close out income, expense or balance sheet accounts during or at the end of an accounting cycle. Performance Expectations A. Reconciliation of Balance Sheet Accounts 1. Define Reconciliation 2. Identify Asset Accounts to be Reconciled 3. Identify Source Documents for Reconciliation 4. Determine Reconciliation Process 5. Reconcile Balance Sheet Accounts 6. Prepare Ending Balance Sheet B. Closing Accounts 1. Define Closing of Accounts Procedures 2. Identify Accounts to be Closed 3. Determine Closing Entries 4. Post Closing Entries to Ledgers 5. Reconcile Balance Sheet Accounts 6. Prepare Ending Balance Sheet Instructor Information

Instructor Name: E-mail Address: Instructor Office Information Room: Campus: Address: City: Office Phone: Fax: Office Hours: Grading Information Grading Rationale: Grades will be assigned based on the student's effort to correctly and accurately reconcile and close out appropriate accounts in the record keeping system. Grading Scale Policies and Information Pass/Fail At least a C grade requirement A. Able to correctly reconcile and close appropriate accounts in a timely fashion B Able to reconcile and close most accounts in a timely fashion C Understands the process of reconciliation and the closing of accounts and is able to reconcile the checking account D. Understands the process of reconciliation and closing F. No effort to reconcile or close appropriate accounts

SBM RECONCILING AND CLOSING ACCOUNTS SBMT 2135 SECTION 1: Reconciliation of Balance Sheet Accounts What is Reconciliation.. 1 Reconciling in QuickBooks. 2 Reconciling in Peachtree. 8

RECONCILIATION Reconciliation is a system of checks and balances to insure that all the accounts in the general ledger are accurate. Expense accounts should be checked to justify the proper account. Example is Advertising vs Repairs. The same is true for income accounts. The balance sheet accounts are more difficult and usually require some form of external document to verify the balance in the account. An example is the checking account in the computer is reconciled to the bank statement, an external document. The time to do this is usually at the end of an accounting period monthly. Source documents to be used in reconciling are: 1. Bank Statements 2. Bank Savings Statements 3. Inventory list if you are tracking inventory in computer 4. Accounts Receivable - list of customers. Is the A/R Aging Report correct? 5. Accounts Payable - list of vendors. Is the A/P Aging Report correct? 6. Payroll liability list (Fed & State) 7. Balance owed on bank loans 8. Credit card statements 9. Depreciation Schedule 10. Sales Tax owed The reconciling procedure for the computerized program should be used. See addendums for QuickBooks and Peachtree. There are usually a number of adjusting entries that need to be adjusted each month. They would be general journal transactions. Two accounts need to be adjusted so that the balance sheet amount is correct. 1. Bank service charges 2. Credit card service charges in the checking account 3. Over draft charges and returned checks 4. Interest and principle split on loans 5. Interest income that savings/checking have earned 6. Deposit made by credit card sales 7. Depreciation expense 1

RECONCILING ACCOUNTS IN QUICKBOOKS Reconciling Checking Accounts Reconciling is the process of making sure that your checking account record matches the bank's record. An overview of reconciliation When you keep your records with QuickBooks, you don't have to worry about addition or subtraction errors like you do when you're using a paper check register. Even so, it is important to get in the habit of reconciling your QuickBooks bank accounts on a monthly basis. This helps you avoid overdraft charges for bad checks, gives you a chance to spot possible bank errors, and helps you keep more accurate financial records. Your bank sends you a statement for each of your accounts each month. The statement shows all the activity in your account since the previous statement: The opening balance for your bank account (amount in your account as of the previous statement) The ending balance for your bank account (amount in your account as of the closing date for the statement) The amount of interest, if any, you've received for this statement period Any service charges assessed by the bank for this statement period Checks that have cleared the bank Deposits you've made to the account Any other transactions that affect the balance of your account (for example, automatic payments or deposits or automatic teller machine (ATM) withdrawals or deposits) When you receive a statement from your bank or from a credit card company, you need to reconcile the statement with your QuickBooks records. You can reconcile any QuickBooks bank account, including accounts for savings and money market funds. The goal of reconciling is to make sure that your QuickBooks records and the bank's statement agree about your account balance. 2

Marking cleared transactions To begin reconciling an account, you need to tell QuickBooks which account you want to reconcile. Then you can provide information from the top part of your bank statement. To reconcile your account: 1. From the Banking menu, choose Reconcile. QuickBooks displays the Begin Reconciliation window. 2. In the Account field, make sure Checking is selected. 3. In the Ending Balance field, type 52,881.88. 3

4. In Service Charge field, type 14.00. Your screen should resemble the following 5. Click Continue. QuickBooks displays the Reconcile -Checking window. 6. In the Checks, Payments and Service Charges section, select Check # 265 from Reyes Properties for $1,200.00, and Check #266 from Larson Flooring for $2,700.00. QuickBooks places a checkmark to the left of both items. 4

7. In the Deposits and Other Credits section, select the 12/03/03 deposit from Anton Teschner for $1,200.00. Your screen should resemble the following figure. Tip: The Go To button allows you to select a transaction that needs a correction, jump to the actual transaction in the register to make an adjustment, and then return to the reconciliation window. 8 Click Reconcile Now. QuickBooks displays the Select Reconciliation Report window. 9. In the Select Reconciliation Report window, make sure "Detail" is selected, and then click Display. 5

10. Click OK at the message that QuickBooks displays. QuickBooks displays the reconciliation detail report. It's a good idea to print each reconciliation report, but for the purposes of this lesson viewing the report is sufficient. Because QuickBooks Basic and QuickBooks Pro only store information for the latest reconciliation, you may want to print the report to a file if you think you will want to print the reconciliation report again. QuickBooks overwrites the previous reconciliation report with data from the latest reconciliation. If you're using QuickBooks Premier, you can print the reconciliation reports for all previous reconciliations. In addition, if you're using QuickBooks Premier, you have two additional report options: the reconcile discrepancy report and the reconciliation summary report. The reconcile discrepancy report lists the transactions that have changed since you last reconciled an account. This report is useful when the beginning balance that QuickBooks shows is different than the ending balance from the bank statement for the previous period. The reconciliation summary report provides a quick look at the overall totals for deposits/credits and checks/payments for a reconciliation period. 11. Close the report window. Now you know that the balance in your QuickBooks check register is accurate as of the latest bank statement. The next time you look at the check register, you'll see a checkmark in the Cleared column next to each reconciled transaction. If the Difference amount is not zero, your account does not balance for the current bank statement period. Advise students that, in this situation, they can have QuickBooks record an adjustment transaction that modifies their QuickBooks balance so it agrees with the bank statement. Or, they can find the difference between the check register and the bank statement and correct it. For more information, search the onscreen Help index for reconciling, adjusting for differences. 6

Viewing cleared checks in the register Open the Checking account register to see the cleared checks. To viewed cleared checks in the register: 1. From the Banking menu, choose Use Register. QuickBooks displays the Use Register window. 2. Click OK to accept Checking. 3. Scroll through the register to view the cleared items (checks numbered 265 and 266). Your register should resemble the figure below. Notice that QuickBooks displays a checkmark next to all cleared items. 4. Close the Checking account register. Student test and review.use the checking account register to enter a handwritten check for 76.95. Use the next available check number and make the check payable to Express Delivery Service, for delivery of a new sign. Assign the check to the Freight & Delivery expense account. Write a QuickBooks check to Bayshore Water for 143.87 to pay this month's water bill. Assign the check to the Utilities:Water expense account. 7

Reconciling Accounting in Peachtree ACCOUNT RECONCILIATION Any account in Peachtree can be reconciled using the Account Reconciliation window. To access this window, select Tasks, Account Reconciliation or Account Reconciliation from the General Ledger navigation aid. Account Reconciliation Window This window shows uncleared transactions that have debited or credited the selected account through the end of the current accounting period. You can use this window to reconcile the transactions entered in Peachtree to your bank statement for the account. As you clear transactions reported on the 8

bank statement, the Unreconciled Difference will approach zero. Once the Unreconciled Difference equals zero, the account is reconciled. Additional transactions, such as bank service charges, can be added to the General Ledger while you are reconciling the account using the Adjust button. Each field on this window is described below: CHECKS AND CREDITS Account to Reconcile: Enter the ID of the account you want to reconcile. All uncleared transactions posted through the end of the current period will be listed. Statement Date: Enter the date the bank statement was printed. This date is used for reference only. Clear: Check this box to indicate the transaction listed also appears on your bank statement. Cleared transactions will be removed from the list after you change to the next accounting period. Reference: Lists the reference assigned to the transaction. Amount: Lists the dollar amount credited to the account. Date: Shows the date the transaction was posted to the General Ledger. Vendor/Payee: Lists to whom the check was written. 9

DEPOSITS AND DEBITS Clear: Check this box to indicate the transaction listed also appears on your bank statement. Cleared transactions will be removed from the list after you change to the next accounting period. Reference: Lists the Deposit Ticket ID for a group of deposits or an individual reference number for a debit posting to the account. Amount: Shows the dollar amount debited to the account Date: Lists the date the transaction was posted to the General Ledger. Description: Lists a description of the deposit. Transactions grouped by Deposit Ticket ID will have a description of Deposit Ticket. CLEARED TRANSACTIONS Lists the number of transactions cleared in the Account Reconciliation window and the total dollar amount of those transactions. TRANSACTIONS NOT CLEARED Lists the number of transactions not cleared in the Account Reconciliation window and the total dollar amount of those transactions. UNRECONCILED DIFFERENCE CALCULATION This section shows the calculations used to calculate the Unreconciled Difference for the account. Statement Ending Balance: Enter the ending balance of the account as shown on your bank statement. Outstanding Checks: Shows the sum of all uncleared checks and credits for the account. Deposits in Transit: Shows the sum of all uncleared deposits and debits for the account. GL (System) Balance: Displays the balance of the account as of the end of the current period. Unreconciled Difference: Displays the difference between the Statement Ending Balance and the GL (System) Balance, less Outstanding Checks, plus Deposits in Transit. When all transactions listed on the bank statement are entered and cleared in Peachtree and outstanding transactions have been accounted for, this value should be zero. 10

Beginning Transactions: Click this arrow button to enter uncleared transactions that took place before the date you started using Peachtree. Transactions entered will not affect the General Ledger. These transactions will only be used in reconciling the account. ACCOUNT RECONCILIATION TOOLBAR Cancel: Discards changes made and closes the current window. OK: Saves changes made and closes the current window. If needed, you can return to the Account Reconciliation window at any time in the current accounting period. Range: Displays the Clear Range window where you can enter a range of check numbers to be cleared. Row: Opens a drop-down list. -All (checked): Checks the Clear box for every transaction listed -All (unchecked): Unchecks the Clear box for every transaction listed. Adjust: Displays the Additional Transactions window where you can enter withdrawals and deposits that are included on your bank statement but not entered in Peachtree. An example of an additional transaction would be interest earned. Entries made in this window are stored as General Journal entries. Help: Displays topics related to the current window. ACTIVITY - RECONCILING A CASH ACCOUNT The bank statement for March has arrived and includes a bank charge that is not posted in Peachtree. The National Bank Checking account will be reconciled using the statement. Follow these steps to reconcile the account: 1. Select Tasks, Account Reconciliation. Select account 10200 from the Account to Reconcile lookup list. 2. Enter 03/31/01 in the Statement Date field. 11

3. Enter 32438.39 in the Statement Ending Balance field. 4. Clear the following checks. - 3284-3285 - 3286-3287 5. Also clear the Auto Withdrawal dated Feb. 15, 2001. 6. Clear all deposits listed. 7. To enter the bank charge, click Adjust on the toolbar. 8. Under the Additional Withdrawals amount field, enter 25.00. 9. Enter March Bank Charge in the Description field. 10. Enter BC-03 as the Reference. 11. Enter 62000 in the Account field. Enter 03/31/01 in the Date field. 12. Click OK to save adjustment. 13. Clear the adjustment. 14. The unreconciled difference should be zero. Click OK to save.

SBM RECONCILING AND CLOSING ACCOUNTS SBMT 2135 Section 2: Closing Accounts Closing Accounts 1 Closing in QuickBooks. 2 Closing in Peachtree 3 Examples of Closing Adjusting Entries Using General Journal.. 4

CLOSING ACCOUNTS Final closing entries are done automatically by the computerized accounting program. It closes the net income for the year into retained earnings or owner s capital. The final year-end adjusting entries would be similar to the accounts that are adjusted each month. Additions would be the closing of any account in the equity section that should be closed. Example: 1. Open balance equity 2. Owners draw 3. Dividend paid 4. Owners withdrawal of prior profits 5. Final depreciation adjustment from accountants 1

CLOSING ENTRIES IN QUICKBOOKS As you know, QuickBooks updates most account balances appropriately as you change fiscal years. Although QuickBooks automatically posts profit or loss to equity, QuickBooks doesn t distinguish between Equity accounts that should be closed and Equity accounts that contain ongoing balances. So, depending on your form of business, you may need to make journal entries on the first day of each fiscal year to close appropriate Equity accounts for the preceding year. For example, if you have a sole proprietorship or a partnership, you ll need to prepare journal entries to close the Draw and Contribution accounts. If you have a corporation, you ll need to prepare a journal entry to close the Dividends account. If you are unsure about how to prepare these journal entries, ask you accountant or SBM instructor for help. CLOSING ENTRIES IN PEACHTREE When using Peachtree Accounting, the income and expense accounts are closed automatically to the Equity section of the Balance Sheet at the end of the fiscal year. The net income in the Income Statement is closed to the Retained Earnings on the 1 st day of the new fiscal year. Other accounts in the Equity section are set-up as one of two choices; 1. gets closed or 2. doesn t close. This means they will either be closed to Retained Earnings automatically or not closed. The amount stays the same for the next fiscal year, if you don t close. This choice can be changed. Examples of Equity Accounts: 1. Owners Draw & Contribution 2. Paid in Capital 3. Dividends 4. Capital Stock 5. Partners Draw and Contribution Normally, 1, 3, & 5 get closed and 2 & 4 don t close. If you are unsure when setting these accounts up, check with your accountant or SBM instructor. 2

MONTHLY JOURNAL ENTRYS Business: Month: ACCT# Description DR CR Bank SVC Charge Checking Account To record bank SVC charge at end of month statement Credit card SVC charge Checking account To record credit card SVC charge at end of month Office supplies Checking account To record purchase of checks from bank Cash in checking (from credit line loan) Note payable line of credit To deposit cash in checking from CR line loan Note payable (line of credit/bank) (PRIN) Interest Expense Checking account Auto payment to bank of line of credit monthly Note payable (bank or firm) (PRIN) Interest Expense Checking account To make monthly automatic payment on loan Expense Expense Expense Expense Expense Owner Draw Account To record cash expended by owner for purchases w/o check 3

Credit card payable Interest expense Cash from checking To make payment on credit card (no vendor set up) Expense Expense Expense Expense Expense Credit card payable To record purchases through the journal when made with a credit card and no vendor set up REFERENCE: CHECK NUMBER Sales tax payable Cash from checking To pay monthly/quarterly sales taxes REFERENCE: CHECK NUMBER FUTA payable Cash from checking To pay FUTA taxes REFERENCE: CHECK NUMBER SUTA payable Cash from checking To pay SUTA taxes REFERENCE: CHECK NUMBER FICA employee payable FICA employer payable Medicare employee payable Medicare employer payable Federal withholding payable Cash from checking To pay taxes on Form 941 or monthly deposit REFERENCE: CHECK NUMBER MN State withholding Cash from checking To pay MN withholding taxes on MW-1

4 REFERENCE: AUTO OR CHECK NUMBER Petty cash expense Petty cash expense Petty cash expense Petty cash expense Petty cash expense Petty cash expense Petty cash account To record expense using petty cash REFERENCE: CHECKNUMBER Petty cash account Cash from checking To transfer money from checking to petty cash for start-up of petty cash or reimbursement from above expenses REFERENCE: CHECK NUMBER Fixed asset Cash from checking To purchase item over $200 (list on depreciation schedule) REFERENCE: CHECK NUMBER Checking Account Bank Loan To purchase item over $200 (list on depreciation schedule) ***NOTE*** Money must be deposited first if from loan, etc.) Damage expense Inventory To record monthly store damages from inventory Store use expense Inventory To record items used from store inventory Owner s draw account Inventory To record owners personal use of inventory NSF Check receivable Bank charges Cash in checking To record bad check (keep log of)

Bad debt expense NSF acct receivable To record back check uncollectable 5 Cash in checking Bank service/store charges Bad debt expense To record bad check or account collected after it has been entered into NSF receivable (correct log of bad debt expense) (deposit separate from daily sales) REFERENCE: CHECK NUMBER To record REFERENCE: CHECK NUMBER To record 6