Account Reconciliation Training

1. Account Reconciliation Training The University of Texas-System The University of Texas – Pan American

2. Course Objective This course consists of two primary objectives: • To inform reconcilers of all resources needed to perform a proper reconciliation, and to provide background on these resources • To provide a step-by-step guide to a proper and complete account reconciliation

3. Background

4. What is an account reconciliation? An account reconciliation is a comparison of two sets of information: 1) the accounting statement plus the payroll statement from Personnel, and 2) support documentation for departmental transactions. You could compare this process to the balancing of your checkbook – each transaction in the bank statement (represented by the accounting statement) should be matched against your checkbook (the support documentation)

5. Why reconcile departmental accounts? • To ensure that the expenditures which have been charged to the department’s accounts were properly approved and charged to the correct account. • To ensure that all revenues which have been earned/collected by the department have been credited to the correct account. • This control activity helps to ensure the accuracy and completeness of transactions which have been posted to the department’s accounts.

6. Why reconcile departmental accounts? (continued) In order to check for accuracy and completeness, reconcilers must make certain that each transaction posted in the statement of account has a match in the department’s support documentation. Simultaneously, each transaction found in the support documentation must have a match in the statement of account. Matching transactions must be consistent in dollar amount. Items that do not match or have different dollar amounts are reconciling items and must be explained.

7. Why reconcile departmental accounts? (continued) Other important goals of the reconciliation process include: • To provide the account manager with an accurate amount for the remaining (available) budget balance • To make certain that each transaction that affects the account has been properly approved

8. Who should prepare account reconciliations? • To ensure proper segregation of duties, the person who approves expenditures or handles cash generally should not prepare the account reconciliations. • It is best for reconciliations to be prepared by the department’s support staff, but reviewed and approved by the account manager. In situations where the account manager is the only employee available to perform reconciliations, he/she may reconcile. • The account manager should provide the reconciler with copies of all support documentation for transactions.

9. When should account reconciliations be prepared? Departmental account reconciliations should be prepared monthly and preferably within two weeks of the receipt of the Statement of Account. Reconciliation reports should be kept on file in your department for audit purposes.

10. Types of Transactions You will encounter the following types of transactions in the accounting system: • Revenue transactions • Expenditure transactions • Encumbrance transactions • Budget changes and carryforwards The department should maintain support documentation for each of these types of transactions.

11. Support Documentation Each type of transaction has several different types of support documentation. Examples include: • Budget changes and carryforwards – budget change forms, or documentation of budget at beginning of fiscal year • Expenditures – invoices, report of phone charges, packing slips, travel vouchers, receipts, etc. • Encumbrances – small purchase orders, departmental purchase requisitions, purchase orders, travel applications, etc. • Revenue – deposit receipts, etc.

12. Types of University Accounts

13. University Account Structure A University account number consists of six digits; the first digit reveals the specific type of account. For example, accounts beginning with the number “1”, such as 111001, are considered state fund accounts. Different types of accounts receive funding from different sources, and each account type has distinct spending restrictions.

14. “1” Accounts – State Funds State fund accounts primarily receive funding from the following two sources: • State Appropriations • Tuition All expenditures made from these accounts must support activities that represent the primary functions of an institution such as: • Education, Research, Academic Support • Institutional Support, Operation and Maintenance of Plant Examples of expenditures that do not support these activities include: • Advance payments for goods or services before their delivery (exceptions: newspaper/magazine subscriptions, seminars) • Money, goods, or services to a charitable organization • Food, coffee, cream, sugar and similar items that employees or visitors would consume • Plants, flowers, or floral arrangements • Awards in excess of $50

15. “2” Accounts – Designated or Local Funds These funds have been internally designated by University management or by the Board of Regents for a specific use (which must be an educational purpose). The internal designation may be removed or altered at management’s discretion. No broad set of restrictions exists for these accounts, but expenditures made must comply with the specific purpose of the account. Primary uses of designated funds include instruction and institutional support. Designated fund accounts primarily receive funding from the following two sources: • Tuition – designated (formerly general use fee) • Sales and services of educational activities • Fees

16. “3” Accounts – Auxiliary or Student Services An auxiliary enterprise exists to furnish goods or services to students, faculty, or staff, and it assesses a charge directly related to, although not necessarily equal to, the costs of the goods or services. The distinguishing characteristic of an auxiliary enterprise is that it is managed as an essentially self-supporting activity – it finances its operations through its own revenues. Examples include: • Athletic programs • Food services • Dormitories Expenditures made from auxiliary accounts must correspond to the service the particular department provides.

17. “5” Accounts – Restricted Funds Funding for these accounts consists primarily of gifts, contracts, and grant funds from federal, state, local, or private donors; these funds are restricted by the donor as to how they are spent. Expenditures made from these accounts must comply with the restrictions set forth by the donor.

18. Examples of Unallowable Transactions for “5” Accounts • Alcohol • Entertainment • Fines • Donations • Goods and services for personal use • Fundraising • Lobbying • Memberships in civic, social, or community organizations or country clubs • Proposal costs • Refreshments/food – unless specifically approved by funding agency

19. Other University Accounts In addition to the University accounts covered on the previous slides, reconcilers may encounter other types of accounts. Loan fund accounts are designated as “6” accounts. These accounts maintain the resources that are available to make financial aid loans to students. Plant fund accounts are designated as “7” accounts. These account for the resources that are committed to fund capital projects approved by the Board of Regents, such as construction of a building or renovation of existing facilities. Agency fund accounts are designated as “8” accounts. These funds are owned by an outside entity or individuals, but the University is acting as their custodian or fiscal agent.

20. Statements of Account

21. Monthly Statement of Account The monthly statement of account is a three-part report consisting of the following: • Account Summary • Open Commitments (encumbrances) • Report of Transactions

22. Format of the Account Summary Information in the account summary portion of the statement is provided by object code. Totals are provided for each object code, for groups of object codes, and for the account in total. An example of an account summary is provided on the next slide. This portion of the statement provides a summary of the account budget and how it is being used. It summarizes the budget balance itself, how much has been spent from the account, how much revenue has been taken in, and how much has been encumbered to come to the available (remaining) balance.

24. Format of the Open Commitments Status Report This portion of the statement of account provides information on all encumbrances open at the beginning of the month, and where they currently stand. The next sheet provides an example of the open commitments status report. Encumbrances are account funds that are set aside as a result of a purchase order, departmental requisition, travel application, etc., for a future purchase. These funds have not yet been spent (no expenditure has been recorded), but they have been set aside in anticipation of a future expenditure. Each outstanding encumbrance is listed, and they in order by object code. This portion provides the original amount of the encumbrance, expenditures and adjustments made against the encumbrance, and the remaining amount of the encumbrance.

26. Format of the Report of Transactions This portion of the Statement of Account provides information on each transaction that affected the account during the month. The next slide provides an example of a report of transactions. When looking at dollar amounts on this sheet, keep in mind that negative amounts are credited to your account and positive amounts are debited. Therefore, revenue would show up as a negative amount, and an expenditure would show up as a positive amount.

28. Object Codes An object code is a four-digit code that outlines the objective of an expense or revenue transaction. It is often labeled as “sub-code” on the statement of account. Object Code RangeExpenditure or Income Class 0001-0009 Income for sales, fees, admissions, interest, rentals, etc. 1000-1499 Expense - Salaries of Employees 1500-1800 Expense - Wages of Hourly Employees 2000-2999 Expense - Fringe Benefits 3000-3999 Expense - Operating Costs 4000-4999 Expense - Books 5000-5999 Expense - Computer Services 6000-6999 Expense - Loans and Grants to Students 7100-7999 Expense - Travel 8000-8999 Expense - Capital Outlay 9000-9998 Expense - Merchandise for Resale

29. Transaction Codes A transaction code is a three-digit code that provides the nature of the transaction (i.e., whether the transaction is a revenue, expenditure, encumbrance, etc.) Transaction CodeTransaction Description 020 Original Budget Entries 021, 022 Budget Revision/Transfer 026 Budget brought forward for Encumbrance 031 Electronic Funds Transfer (Direct Deposit) 050-059 Encumbrance 060 Journal Voucher 061 BRS Feeds (Billings & Receivables System) 062 Fixed Assets Feed 063 Payroll Disbursement 064, 065, 068, 04x Disbursement Voucher 066 Interdepartmental Transfers 067 LMS Feeds (Loan Management System) 098 Beginning Balance Transactions

30. Reconciliation Process

31. Step 1 – Listing of Accounts The person performing departmental account reconciliations should obtain from Accounts Control (AB 217) a listing of all accounts which have been assigned to the department, or to persons employed by the department. The accuracy and completeness of the listing of accounts should be confirmed at least annually. Monthly Statements of Account are provided by Accounts Control. If the department does not receive a statement, the reconciler should contact that office to request a copy. The department should not expect a report if the account had no activity for the month.

32. Step 2 – Check Beginning Balances The reconciler must verify that the starting point (your revised budget balance) is correct. If no budget changes or budget carryforwards have affected the account during the month, the revised budget balance (check the account summary) for each group of object codes should match that of the previous month. If budget changes or carryforwards have been made, the new revised budget balances should reflect those changes. The reconciler must make certain that the revised budget reflects these changes.

33. Step 3 – Current Period Activity In this step, the reconciler agrees each revenue, expenditure, and encumbrance transaction in the statement to supporting documentation. He/she then agrees each transaction in the support documentation to the accounting statement. Through this process, the reconciler: • Finds items in the statement which do not have a match in the support documentation • Finds items in the support documentation which do not have a match in the statement • Finds matching items which do not agree in dollar amount

34. Step 3- Current Period Activity (continued) Payroll reconciliation Payroll entries are unique because each employee’s transactions are not listed separately on the statement, and because each transaction will not necessarily have its own supporting documentation. The reconciler will need to use the memorandum of employment (plus the timesheet for wage employees) to verify the accuracy and completeness of payroll transactions. Each employee’s payroll transactions may be found on an HRS report mailed out by Accounts Control each month.

35. Step 3 – Current Period Activity (continued) Proper Approval In addition to checking for accuracy and completeness of transactions, the reconciler must make certain that each transaction has proper approval. Approval may be given by the department’s account manager, or another employee who has been given delegated signature authority by the manager.

36. Step 4 – Reconciling Items Reconciling items are situations in which the two sets of information (the statement and the supporting documentation) do not perfectly match. There are several different reasons why transactions would not match. Missing support documentation The reconciler may occasionally be without a copy of the support documentation for an item listed in the statement. In this situation, he/she should contact the appropriate office and request a copy of the document.

37. Step 4 – Reconciling Items (continued) Timing differences These are items that have not posted to the statement yet. An example would be a purchase order that the department has issued , but that has not been posted. During the reconciliation process, the reconciler will need to make certain that all timing differences from previous months have posted. He/she will also need to make a note of the current month’s timing differences for future reference.

38. Step 4 – Reconciling Items (continued) Proposed corrections The reconciler will occasionally need to propose corrections to the accounting system. He/she should have proposed corrections approved by the account manager before contacting the appropriate department. The reconciler should make certain that all proposed corrections from previous months have posted. He/she should make a note of the current month’s proposed corrections for future reference.

39. Step 5 – Reconciliation Report The reconciler should provide a reconciliation report to the department’s account manager after the reconciliation has been completed. The reconciliation report should be signed and dated by the reconciler, approved and signed by the account manager, and filed within the department along with other materials used in the reconciliation process.

40. Resources If you have any questions related to account reconciliation, information on monthly reconciliation training sessions, or distribution of account statements, please visit our web site at http://comptroller.panam.edu/acct_cont.html

41. Account Reconciliation Training Quiz

42. Question #1 Which of the following are important goals of an account reconciliation? To check for accuracy in dollar amount To check for completeness of transactions in both the statement and the supporting documentation To make certain that each transaction has proper approval All of the above

43. Sorry, try again Review

44. Question #2 When should account reconciliations be prepared? After the end of each quarter At the end of the fiscal year Prior to an audit After the monthly statement of account is received

45. Sorry, try again Review

46. Question #3 Which type of support documentation would be used to support an encumbrance transaction? Invoice Deposit receipt Purchase order Travel voucher

47. Sorry, try again Review

48. Question #4 The February Open Commitments Status portion of the statement would provide information on all encumbrances that have posted to the account during the fiscal year. True False

49. Sorry, try again Review

50. Question #5 In a department with five employees, each employee’s payroll transactions appear separately on the statement of account. True False