Blog

Why Are Bank Reconciliations Important?

If you’ve ever seen someone tearing their hair over a reconciliation that just won’t balance, maybe you’ve wondered what the fuss is all about. Why are reconciliations, or “recs” or “recons” as you may have heard, so important?

For the purposes of this post, we’re going to focus specifically on Quickbooks Online.

Bank Transaction Imports

Let’s lead in with something very important that bears repeating. If you are the person who imports online banking transactions into your software, then:

Pay careful attention to what you’re doing during the bank transaction import.

The bank transaction import is the first step of your bank reconciliation. If you can ensure that everything goes to the right place on the way into your books, then the reconciliation will go much easier.

Here’s a tutorial on bank transaction imports for Quickbooks Online.

Abe Lincoln once said, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” Doing a careful, proper bank transaction import is similar — if you’re cautious enough then you’ll often spend a lot more time on the transaction import than the reconciliation itself!

 

Watch Out For Uncategorized Income!

One of the most important things to look out for during a bank transaction import is to make sure that you’re not importing anything to “Uncategorized Income” unless you really mean to. Assigning items to Uncategorized Income often results in your QBO bank deposits not matching properly to the bank import.

If You Receive Checks, Use Undeposited Funds

As a bit of an aside, if you receive physical checks from customers then it’s best to receive them to Undeposited Funds in the Receive Payments screen. Then, deposit all of them together with a Bank Deposit from the “+” icon. You can think of Undeposited Funds as the virtual equivalent of your zip-up bank deposit baggie.

If you don’t do this, then your books and the bank might match in dollar amount but not in the number of transactions. For example, your Quickbooks might have three $100 deposits while your bank statement shows one $300 deposit.

The Reconciliation Itself

So you’ve spent a whole month carefully importing your online bank transactions (you do reconcile monthly, right?) and now it’s time to seal the deal. It’s time to click on that gear icon and begin your reconciliation! Here’s a tutorial on how to reconcile your bank account.

Finding the Leftovers

Reconciling is all about finding the leftovers. You start off by eliminating all the transactions that your QBO books and the bank agree on: this is probably the bulk of the month’s activity and would include most of your checks and deposits, and almost all of your electronic funds transfers.

But the real point of reconciling is to find the leftovers and examine them! What are the transactions that haven’t cleared, and why haven’t they cleared?

Common types of leftovers and examples:

Items that appear in your Quickbooks but won’t appear in the bank statement:

  • Checks recorded in QBO that haven’t cleared the bank
    • Example: You handed Employee Ned a check on the 5th of last month, but he left it in his glove compartment. Maybe it’s time to consider direct deposit, if only for his sake!
  • Deposits in-transit
    • Example: Your customer initiated an electronic funds transfer to you on the 31st and you booked it in Quickbooks, but it hadn’t hit the bank account by month-end.
  • Bank errors — in my experience this is rare, but it can happen
    • Example: The bank employee depositing a check transposed some numbers and accidentally deposited a $565 check as a $656 check.

 

Items that appear in the bank statement but that might not be in your books yet:

  • Errors on your company’s books — it happens to the best of us!
    • Example: Employee Ned asked for a payroll advance at the end of the day, so you pulled a check and hand-wrote it to him, but you forgot to book it in Quickbooks. Maybe he asked for the advance because he left that paycheck in his glovebox! (For the record, we recommend against handwriting checks unless that is your normal way of operating.)
  • Bank fees, penalties, service charges, etc.
    • However you like to call it, many banks like to nickle-and-dime you. Depending on how closely you’re watching your bank accounts, you might not notice these fees until you see the bank statement.

Examining the Leftovers

There are two parts to examining your leftovers:

  • First, think about the whys of this leftover. Why did it happen? It’s not always a bad thing to have a leftover, but sometimes it’s the result of an inefficiency that can cost you time or money.
  • Second, think about the hows — how will you get your books to match the bank statement? Unless there’s a bank error, you want your QBO bank account to be a mirror image of the bank statement.

Tying It All Together — Why Is It Important to Reconcile?

Okay, time to wrap all of this up. Why is it important to reconcile?

If your bank account is not reconciled, then it’s possible that your business has less cash than you think. When it comes to payroll or payables, you may end up committing to spending more money than you have available and landing in overdraft territory.

Reconciliation is one of many error-checking processes that you can use to make sure your books are squeaky-clean. An error discovered during a bank reconciliation can lead to finding other errors. For example, accidental duplicate invoices could mislead you into thinking that your business is more profitable than it actually is!

TL;DR: Yes, you need to be reconciling your books. If this isn’t your jam we can do it for you, or we can show you how in a training session.

July 1st, 2019 change to Point-of-sale WA State Sales Tax

Let me start by apologizing for the ungainly blog title, and then I’ll quote the summary of the change that will happen on July 1st as stated on the Washington State Dept of Revenue website:

Starting July 1, 2019, the retail sales tax exemption for certain nonresidents of Washington state, on purchases of tangible personal property, digital goods, and digital codes, will no longer be available at the point of sale. Instead, these consumers may request a refund from the Department of Revenue for the state portion of the sales tax they paid.”

The article goes on to say that this refund is only available for certain areas.

There’s a lot to unpack here, so let’s take it one step at a time.

Goods

Do you sell tangible goods, digital goods, or digital codes to non-Washington residents? If yes, then this blog post is for you!

If you don’t know, then let’s define tangible goods, digital goods, and digital codes.

Tangible goods

Tangible goods are goods that you can touch: cars, cucumbers, cutlery, crayons, all sorts of things. It gets a little tricky when you try to distinguish “tangible property” from “real property.” Real property is stuff that’s permanently fixed or attached to the land or a building (yes, this includes buildings themselves). This article from the Department of Revenue gets into the distinction between real and tangible property. Don’t let the word “personal” throw you; in this sense it’s very much business property that can be moved.

Still with us? In short, tangible goods are physical items that aren’t considered real estate.

Digital goods

But what are digital goods? Fortunately, the Dept of Revenue defines them for us right here!

Digital goods are data, facts, information, sounds, music, images, videos, or any combination of these, when transferred electronically. That is to say, the movie The Matrix is a physical good when it’s on DVD, but it’s a digital good when it’s downloaded or streamed. Streaming is playing a song or video online through a service like Youtube or Netflix.

What does this definition exclude? Internet access, computer software, a few specialized items that we won’t get into at this stage, and this:

“The representation of a personal or professional service primarily involving the application of human effort.”

What does that mean? Basically, services. For example, when you hire TL;DR Accounting to help you with your taxes or your books, it’s not considered a digital good because it’s primarily the human effort of our hard-working team of specialists.

Digital codes

A digital code is exactly what it sounds like — a code you find in an email, through paper mail, or even on a Mountain Dew bottle — that entitles you to a digital good. The important point to remember is this: if the digital code is for a good that qualifies for exemption, then the code also qualifies.

Non-Washington Residents

Why does the Dept of Revenue care so much about whether your customer is a Washington resident or not? Let’s break it down:

    • If your customer is a Washington State resident, then you charge sales tax at point-of-sale (POS) and then remit it to the Dept of Revenue on a regular basis (monthly, quarterly, or annually depending on your tax owed).
    • If your customer is not a resident of WA, then it used to be the case that customers of certain areas were exempt, that is, they didn’t have to pay the tax at all. This is changing very soon.
    • Starting next week, there will no longer be a point-of-sale exemption for your customers. Instead, customers from these areas can get a refund after the fact:
      • US States: Alaska, Colorado, Delaware, Montana, New Hampshire, Oregon
      • U.S. possessions: American Samoa
      • Canadian provinces/territories: Alberta, Northwest Territories, Nunavut, Yukon
    • That said, these individuals are ineligible for the refund (quoted from the website):
      • people in the military stationed in Washington
      • nonresident students attending schools in this state
      • any other nonresident temporarily living in Washington
      • Note on dual residents: If a dual resident is a resident of Washington State, they are not eligible for the refund.

 

 

Where Will the Customer Use Your Product?

We’ve talked about two requirements out of three so far: the type of good and the customer’s residence. The third requirement is that the product is used in one of the areas listed above. An illustrative example would be food at a restaurant. Since it’s generally for consumption on-site, it doesn’t qualify for this refund.

Marijuana Sales

As you might expect, marijuana is the exception. Marijuana sales are not eligible for this new refund.

Final Notes

  • Customers can begin applying for this refund starting January 1st, 2020, for purchases made during the second half of 2019.
  • They get only one refund request per year, it must be for more than $25.00 in taxes paid, and it must include receipts and proof of residency.
  • Per this Dept of Revenue advisory, “proof of residency” has these requirements:

The identification must be a valid driver’s license issued by the jurisdiction in which the out-of-state residency is claimed or a valid identification card issued by the out-of-state jurisdiction. The identification must (A) bear the photograph of the holder, (B) show the holder’s residential address, (C) identify the holder’s name, and (D) be issued for the purpose of establishing residency.

A Quick Review

That was a lot to unpack! Here’s what we’ve covered:

  • Starting July 1, 2019, non-Washington resident customers who buy tangible goods, digital goods, or digital codes will no longer be able to claim a point-of-sale tax exemption.
  • Customers (from eligible areas only) may instead apply for a refund.
  • Items must be used or consumed in these eligible areas and not in Washington.
  • While it is now up to the customer to apply for refunds, it can still help to be able to inform your customers on the refund process:
    • Once a year, a customer can apply for a refund of $25.00 or more for sales tax from the previous year. They must attach proof of residency.

 

TL;DR: If you are selling goods to customers across state lines you need to make some very quick changes. Contact us about the above!

 

Team member spotlight: Geoff

 

Geoff is a fantastic steal for our team, with his experience, knowledge and upbeat attitude. Not to mention he totally is a geek like the rest of us.

Why did you decide to become an accountant?  

Ever since I was a kid, I always loved to calculate how to play video games and board games optimally for my chosen play style (some call this “min-maxing”). This led me towards a career field that is all about maximizing efficiency!

When were you hired for TL;DR?  

I started at TL;DR on June 10, 2019.

What made you decide to want to work for TL;DR?  

The name attracted me at first; I’m a fan of irreverent Internet acronyms. The team is very welcoming and I like the gaming culture. Plus, working remotely means I can travel the world and still pay the bills!

What do you enjoy most about TL;DR?

Can I have two? First, it’s having such a knowledgeable and supportive team of accountants on the team. Second, it’s that feeling when an entire year’s worth of transactions reconciles cleanly!

What is a typical work day like for you? 

The day starts off with me checking our chat software (Slack) for any important messages and the occasional hilarious meme. After that I check our task-tracking software (Karbon) to prioritize my work for the day. Then it’s on to the core of my day: using Quickbooks to polish up the books, categorize transactions correctly, reconcile, and all the other wonderful things we do.

What is your favorite tip for small business owners?  

Make sure to carefully track the due dates for your local, county, state, and federal taxes, and prioritize paying the government first. Unlike most vendors, government entities might not hesitate to charge late fees, penalties, and interest on the late fees and on the penalties!

How do you stay informed about developments and changes in the accounting world?  

I stay in compliance with all the Continuing Professional Education (CPE) for my CPA and CMA credentials. Beyond that, I read articles online about new developments and gain a lot of insight talking to all the sharp accountants on our team!

What is your biggest achievement to date – personal or professional?  

My biggest professional achievement would be earning my CPA – lots of sweat went into it! My biggest personal achievement was jumping through all the hoops necessary to land a five-month MBA foreign exchange to Bordeaux, France.

What do you do outside of work?  

I like to watch documentaries, play with my kids, do yoga, meditate, and play video games in my spare time. My current stand-by games are Magic: The Gathering Arena and Beat Saber VR.

If you could be any fictional character, who would you choose?  

I’d have to say Tim the Enchanter from Monty Python and the Holy Grail. He can explode things at will, and he fears nothing (except for The Killer Rabbit of Caerbannog, which is really rather terrifying).

Do you have any advice for those interested in entering the accounting field? 

Talk to your classmates, professors, coworkers, and other accountants you know to get a feel for what different kinds of accounting jobs are like. At some point it will behoove you to specialize, and you’ll have done yourself a favor by gathering knowledge and insights early on.

Are there any other random facts you’d like to share?

Sure! I’m a big fan of the band Boards of Canada, and my favorite TV show is a very serious show about anthropomorphic animals: Bojack Horseman. My wife and I are testing out this intermittent fasting phenomenon that’s sweeping the Internet these days. We have two children: Nora and Jack.