Are Bank Import Features Driving Reconciliations to Extinction?

I guess I’m an “old school” guy when it comes to accounting for my personal finances.Shot in the back by Bank Import I enter transactions into QuickBooks in real time.  Whenever I write a check or pay a bill online, they immediately go into QuickBooks.  I save all of my receipts, put them in a folder, and enter them in batches at least once a week.  These are important processes for me because I am always aware of the amount of cash I have available despite the balance that shows when I log into my bank’s online banking website. Once a month, the bank statements come (electronically, of course).  I reconcile the transactions I entered manually to the bank statements.  Whenever there is either a discrepancy or an transaction on my bank statement that is not in QuickBooks, I investigate it.  Usually, it is because a receipt is still at the bottom of a plastic bag from a grocery store.  Sometimes, though, I have discovered errors or other things that resulted in me getting a refund during the process of reconciling bank statements. Recently, I have been experimenting with a few SaaS (web-based) accounting software tools (go to fellow CPA blogger Shane Eloe’s blog for some useful reviews).  Most of the SaaS accounting systems I have tested do not have the ability to reconcile bank accounts, but they do import and/or sync with bank transactions.  So, are we near the time to say goodbye to the bank reconciliation as we know it? I think the bank import and sync features can be big time-savers and eliminate much of the drudgery that goes along with redundant data entry.  Data such as the date, payee, and amount are automatically imported, leaving it up to the user to classify the transactions.  With some of the SaaS software packages, the program learns from past experience to automatically classify transactions and matches up the data being imported with what the user has already entered to eliminate duplicate entries.  Awesome stuff. My concern is that over-reliance on the online banking features and not reconciling bank accounts will lead to problems.  A user that imports bank transactions instead of entering them as they happen will not have the same grip on cash flow.  That user would probably also be more inclined to just accept what is on the bank statement rather than verifying that the bank activity is correct.  For a user that uses one of these SaaS accounting software packages for a business, it raises all sorts of questions for the CPA or accountant who prepares the tax return:
  1. What if the cash balance on the balance sheet is significantly different than the ending balance on the bank statement?  Without a bank reconciliation, determining the reason for the difference would be a nightmare.
  2. How does the tax preparer know that there were outstanding checks or online transactions that occurred and are deductible in a given year, but did not clear the bank (and therefore not imported) until the next year?
If you’ve discovered a solution to these problems and questions, I’d love to hear from you.  Please leave a comment below.
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A Refund from my Overfunded Escrow Account

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As I wrote in an earlier post, I use QuickBooks to organize my household finances.  Like every good accountant, I am detail oriented and keep meticulous records.  I keep every receipt, reconcile each of my accounts monthly, and split the expense categorization of grocery bills between food, cleaning and baby products (OK, just kidding on the last one). One transaction that I do split out every month is my mortgage payment.  My mortgage payments are made up of three parts: loan principal, interest, and escrow.  In case you don’t know what an escrow account is, it’s a cash account that the lender holds and maintains to pay property taxes and hazard insurance. To keep track of my escrow account balance, I created an account in QuickBooks for it under other current assets.  When taxes and insurance payments are made by the bank, I enter those in QuickBooks as expenses out of the escrow account.  I frequently tie out my escrow account balance in QuickBooks to the loan statements. Lenders usually do an escrow analysis every year to adjust the amount of the escrow payment so the balance in the account is sufficient to cover the expenses.  Usually, the amount of the mortgage payment goes up as tax and insurance rates increase.  However, in my case, I significantly decreased my insurance payments (a good subject for another blog post) and my property tax payments have also decreased due to the crash of the Las Vegas real estate market. Recently, I noticed that my escrow account had a large balance despite barely having made payments for taxes and insurance.  I sent the following e-mail to the bank:
I think our escrow account is overfunded. I’d like to request an analysis and receive a refund of any overfunded amount.
The next morning, I was delighted to receive the following e-mail from the bank:
Per your request, we have analyzed your escrow account based on the current escrow balance. Your new mortgage payment is $X effective September 01, 2010. Also, an overage amount of $X has been mailed to your mailing address.
Sometimes having organized financial records pays off.  I’ve got the check to prove it.
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The Importance of Accountability in a Personal Budget

Many years ago, I was involved in an organization in which I and other volunteers received a weekly allowance to cover various expenses such as transportation and meals.  In one of our meetings, the president of the organization announced that some of the volunteers had come to him and complained that the allowance wasn’t sufficient to cover the expenses (I was not one of them).  He told us that he would consider increasing the amount of the allowance for those who would provide a detailed accounting of their expenses proving a need for a higher allowance.
At our next meeting about a month later, the president said that nobody had presented a list of expenses, so he assumed our allowances must have been sufficient. I could see the embarrassment in the faces of the others in the room.  With the task of keeping track of their expenses, those people probably paid more attention to what they were spending money on and realized that many of those expenses weren’t really necessary. I’ve been to many seminars and seen TV shows about making a personal budget, and while they may offer some good money saving tips and show how to make a fancy budget spreadsheet, I’ve found many of them lacking in the emphasis of accountability.  An ideal spending and saving plan doesn’t provide much of a benefit without the ability to compare actual expenses to budgeted amounts. Without organized financial records in place, people are left wondering, “where did all the money go?”  They might make a guess on how much they spent during the past year on clothing, gasoline, or food; but from personal experience, I know those estimates are usually way off.  By the way, I don’t think having a year-end spending statement from a credit card company counts as being financially organized. The best way to organize personal finances is to use a good computer program (I use QuickBooks, and here’s why) that puts together all of a person’s financial information, including  bank, investment, loan, and credit card accounts.  I began doing this a few years ago, and since then, I’ve been able to solve the riddle of “where all the money goes.”

My First Lessons about Managing Debt Came from a Video Game

When I was fifteen, I played a computer game that simulates building and operating an amusement park.  The object of the game is to make money by thrilling patrons on the rides, taking care of their basic needs (extra sugar in the sodas), and making them happy enough to empty their pockets on souvenirs. The game begins with enough cash to build a park, but it is all debt financed. The first time I played the game, I paid little attention to the financial side of it.  I just wanted a really cool looking amusement park.  I blew almost all of the cash building a Ferris wheel, an inner tube water ride, and a roller coaster, all of them customized to be as tall, long, and fast as the game permitted. Then, expenses popped up that I wasn’t planning for.  I quickly figured out that my patrons couldn’t find any restrooms.  When I saw smoke coming out from some rides and kids were falling out of them, I had to hire mechanics.  Oh, and I had to hire janitors to clean up after a few kids that must have ridden my extreme roller coaster one too many times. Just when I thought I was making some money, my bank balance was mysteriously drained at the end of every month (a month in the game is about 20 minutes in real life).  After this happened for a few months, I decided to investigate my cash flow problem by looking at my financial statements (imagine that, financial statements in a video game – sounds like real fun) and found that the disappearing cash had gone to pay interest on the debt. Disappointed that my amusement park was headed to bankruptcy, I gave up on it and started a new one.  This time, I immediately paid the debt down to a minimal amount that I needed to frugally build my park with cheap rides like bumper cars and a merry-go-round.  I paid off the debt as soon as I was able to, and bought bigger rides when I had the cash to pay for them.  Without the burden of interest, I was able to slowly build a bigger and more profitable park than I had the first time. I’m grateful that I learned the importance of avoiding excessive debt and spending through a video game, rather than a real-life scenario. Now, I could talk about when I played SimCity and hiked the tax rates, but I’ll save that for another blog post.