Are you reconciling deposits…?

Over a year ago, I wrote about accounts receivable general ledger reconciliation. This issue examines a similar process – reconciling security deposits.

Security deposits should be reconciled with the general ledger just as your accounts receivable is.

Deposit bank accounts

Many utilities keep security deposits in a separate bank account from the operating cash account. This makes reconciling deposits easier, but doesn’t do away with the need to do so.

If you don’t maintain a separate bank account for deposits, it’s especially important to insure that deposits are reconciled.

Does your billing software interface with your general ledger?

As mentioned in the issue regarding reconciling the general ledger, in today’s market any reputable billing software should be capable of interfacing to a general ledger system. So, if yours isn’t, it might be time to consider new billing software.

General ledger entries for deposits

Even if your software doesn’t interface with the general ledger, you should still enter manual journal entries to complete the process.

A few issues back dealt with improving the process for applying deposits. That issue included a link to a T-account illustration detailing each step in the process, if you missed it.

The deposit reconciliation process

The key to reconciling deposits is to insure that the balance of the customer deposit general ledger account(s) (the control account) agrees with the detail report(s) of deposits from your billing system (the subsidiary ledger).

If you maintain a separate cash account for deposits, the balance of this bank account should also agree with the control account and subsidiary ledger.

This reconciliation should take place regularly, at least monthly.

If I’m not reconciling, how do I get started?

Much like the process of general ledger reconciliation, reconciling deposits involves running the necessary report(s) from your billing system and comparing the totals to the deposit account(s) in the general ledger.

If the amounts agree, your work is done. If they don’t agree, you will need to research the difference, correct the general ledger interface setup, enter an adjusting journal entry and repeat the process tomorrow.

Initially, I recommend repeating this process daily. That way, if you are out of balance, you only have one day’s work to look through to find the difference. Once you are confident that everything is set up correctly and the process is working flawlessly, you can discontinue the daily process and make it part of your month-end routine.

If you have any questions about general ledger interfaces or reconciling with the general ledger, please give me a call at 919-232-2320 or e-mail me at mailto:mgsanders@logicssolutions.com.

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© 2013 Gary Sanders

Are you creating extra work for yourself?

It is standard practice for many utilities to keep security deposits in a separate bank account from the operating cash account. This makes tracking and reconciling security deposits easier, but causes unnecessary work for some utilities when applying deposits.

Does your utility write two checks when applying deposits?

When an account is closed and the customer’s deposit is more than their final bill, some utilities end up writing two checks to clear the deposit. These utilities write one check to themselves to cover the final bill and another to the customer to refund the balance of the deposit.

Is there a better way?

Of course there is! A better process is to transfer the full amount of the customer’s deposit from the deposit cash account to the operating cash account when the account is closed. In a practical application, this would happen for several deposits at one time – for example, once per final billing cycle or once a month, for utilities that only send final bills once a month.

This process of applying the deposit creates a credit on the customer’s account and liquidates the security deposit. The credit resulting from applying the deposit will be offset by the customer’s final bill.

If the customer’s final bill is more than the deposit, the net account balance will reflect the balance owed after the deposit is applied.

On the other hand, if the customer’s final bill is less than the deposit, the resulting credit balance is the refund due to the customer.

T-Account illustration

On more than a few occasions in the past, I have resorted to drawing T-accounts to illustrate how this process works for doubting finance directors. So many times, in fact, that a few years ago I took the time to create a document that outlines each step in the process using T-accounts.

If you would like to view this document, please click here.

With any good billing system, each of the steps in this process should be automated. If you are manually applying deposits or writing refund checks, or otherwise find yourself working around your billing software in some way, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com. I would welcome the opportunity to discuss how a business review could benefit your utility.

© 2012 Gary Sanders

How is your general ledger reconciliation going…?

Some utilities wait for their annual audit to be complete and then adjust their accounts receivable based on the auditor’s adjusting entries. Their general ledger accounts receivable balances then remain static for the next twelve months until they repeat the process.

Does this describe your utility? Or have you tried and not succeeded at reconciling with the general ledger? In either case, this issue should prove helpful as we examine how to reconcile with the general ledger.

Does your billing software interface with your general ledger?

If the answer to this first question is “No”, it might be time for you to consider new billing software. In today’s market, any reputable billing software should be capable of interfacing to a general ledger system, regardless of whether the general ledger software is from the same vendor or a third party system.

How often are you updating the general ledger?

Assuming that your billing system does interface with your general ledger, are you updating the general ledger daily? If not, then you are not taking full advantage of the general ledger interface and you can’t rely on your account balances to be correct. Cash and accounts receivable accounts will have incorrect balances if payments are not updated to the general ledger daily.

Does your general ledger include multiple utility receivable accounts?

Does your general ledger contain more than one utility accounts receivable account? For example, do you track water and sewer receivables to different accounts? Or do you bill for services that are accounted for in different funds, such as water and electric? If you do, does your billing software provide a report that details how much is outstanding by service, corresponding to each receivable account? If the answer to this last question is “No”, please refer back to the first section above.

Are you reconciling on a regular basis?

For those who aren’t accountants, how about a brief review of Accounting 101? A subsidiary ledger contains detailed transactions that aren’t posted directly to the general ledger. A control account is a summary level account in the general ledger that contains totals for transactions that are stored in a subsidiary ledger. The individual customer balances in your utility billing system represent the subsidiary ledger, while the corresponding accounts receivable account in the general ledger serves as the control account.

Are you reconciling the balances in the utility billing system with the corresponding accounts receivable account in the general ledger, at least monthly? If not, I encourage you to start doing so and make the reconciliation part of your regular month-end process.

If you’re not reconciling, are you wondering how to get started?

To start the process of reconciling with the general ledger, you need to pick a starting point. The first of a month is an ideal time to start. You will need to establish the beginning balance by running an outstanding accounts receivable report from your billing software. If your billing system has an aged trial balance, this is an excellent report to use. If you will be reconciling to multiple accounts receivable accounts, you will need to run the report from your billing software that gives the total owed by service.

Once you establish the beginning balance, you will need to adjust the receivable account(s) in the general ledger so that they agree with the subsidiary ledger(s). I know – you don’t want to adjust the accounts receivable in the general ledger, especially if it has to be reduced, but this is the only way that you will be able to reconcile.

Generally, receivables are affected by three types of utility billing transactions:

  • Billings and charges increase receivables
  • Payments decrease receivables
  • Adjustments increase or decrease receivables, depending on the type of adjustment

Each time you update billings, payments, adjustments or any other type of transaction in your billing system that impacts accounts receivable, be sure that the corresponding journal entries are updated in the general ledger.

After all transactions for the day are updated in your billing system and in the general ledger, run the appropriate reports from your billing system and compare the outstanding balances with the corresponding accounts receivable accounts in the general ledger. If the amounts are in agreement, everything with your general ledger interface is set up correctly and your work for today is done. If the amounts do not agree, you will need to research the amount that is out of balance and determine which source transactions equal that amount. You will need to correct the general ledger interface setup, enter an adjusting journal entry and start the process over again tomorrow.

As you are getting started, why go through this process every day?

I realize that it probably seems excessive to start out doing this process daily, but it should take no more than 10 or 15 minutes, depending on the number of accounts and speed of your software. By reconciling daily, you restrict the potential out of balance transactions to one day’s activity, making it easier to find the amount that the reconciliation is out of balance. Continue repeating this process daily until you feel confident that you have all of your general ledger interfaces defined correctly. Over the course of a month you should have processed every type of transaction.

Once you have reached this level of confidence, you can discontinue the daily process and make the reconciliation part of your month-end routine.

If you have any questions about general ledger interfaces or reconciling with the general ledger, please give me a call at 919-232-2320 or e-mail me at gsanders@logicssolutions.com.

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© 2011 Gary Sanders