Reconciling Bank & Credit Card Accounts

Q:
I am reconciling the entire 2005-year for a friend. He's got four different businesses that he transfers large portions of money in and out of all the time. It's a "rob Peter to pay Paul" scenario.
How should these transfers be classified? Or what account should the transfers be put under. He wants "Owners Equity" for all of these transfers because he doesn't want them to look like income.
Is "Owners Equity" correct?

A:
If you have ever done a consolidation worksheet, you know that when you lay out balance sheets side-by-side you carefully arrange them so that the appropriate accounts are on the same line and will naturally add across to a meaningful total.
When you are dealing with inter-company transfers of any kind, the accounts used on all sets of records should be on the same line in the consolidation worksheet, and if the balances are reconciled they will sum to zero.
Usually there is a net balance due from or to each company. Since the transactions are related more to borrowing activities, than to capital investments, I prefer not to use equity accounts. I recommend using "Other Asset" accounts for these inter-company transfers.
Every transaction has to be recorded twice, once by each of the two companies that are affected. A disbursement by one goes into the appropriate inter-company account, and the recipient then records a corresponding receipt from the reciprocal inter-company account.
If you have done it correctly you can print a detail transaction report for each of the reciprocal accounts, and when you lay them out on a table side-by-side every debit in one report will be matched by a credit in another report. Including; identical transaction date, description, and memo.
The question about what to do with the resulting net due to- or from- is an issue best left to the tax advisor.
Sometimes when strong departmental segregation is needed within the same company I'll set up a "clearing account" for each department. Since the transfers are intra-company rather than inter-company I'll put the clearing account at the tail end of the chart. With intra-company transfers it usually doesn't matter if there is a balance at the end of the period or not.
What is interesting about this technique is that this is how the accountants did it in the olden days when there were no computers and no mechanical adders, let alone electronic calculators. In large companies they had to break the ledgers down into smaller and smaller components so that a human being could physically work with the amount of data that they had. These individual sub-ledgers were kept in balance through the use of clearing accounts, or in the case of AR and AP there were control accounts to keep them in balance. Reconciling the clearing (and control) accounts was a tedious, but necessary task.

If your QuickBooks beginning balance is different from the beginning balance on your bank statement in your previously reconciled account, you need to find the cause of the discrepancy.

Some reasons that may cause a discrepancy:

You may have uncleared a transaction directly in the account register by mistake. If you do this, your beginning balance will be off by that amount. You'll be able to see this in the Reconciliation Discrepancy report.

or

You've changed or deleted a previously cleared transaction that you have already reconciled. To fix this, you'll need to undo the previous reconciliation, then reconcile again with the correct transactions.

What to do next

1. You can find the discrepancy using the Reconciliation Discrepancy report.
2. If you're able to resolve the discrepancy, click Restart Reconciliation.
3. If you think your discrepancy might be caused by a previous reconciliation, click Undo Last Reconciliation. Once this process completes, you will need to reconcile that particular statement again.

If you don't mind the discrepancy

Ignore the discrepancy for now. When you finish reconciling, QuickBooks adds an adjustment transaction to the Reconciliation Discrepancies account.

It is not a good idea to ignore a large discrepancy. If you do, you'll be adding a large adjustment that you won't be able to account for properly.

To pay a credit card bill, first reconcile the credit card statement against the entries you've made in QuickBooks. After the reconciliation is complete, you can select to pay all, part, or none of the bill.

1. Display the Reconcile window
2. From the Account to Reconcile list, select the credit card account you want to reconcile.
3. Compare the opening balance from your statement with the Opening Balance in the Reconcile window.

If the amounts don't match

4. Find the ending balance on your statement and enter it in the Ending Balance field.
5. (Optional) Complete the "Transactions to be added" section of the Reconcile window:
   • If the credit card statement shows a finance charge that you have not yet entered into your QuickBooks records, enter that amount in the Finance Charges field.
   • In the Account field, enter the expense account you use to track finance charges.
6. When you find a transaction in the Reconcile window that matches a transaction on the statement, click the transaction to mark it as to be cleared. If an amount doesn't match or a transaction contains an error, correct the transaction.
   1. In the Reconcile window, double-click the incorrect transaction to display it.
   2. Correct the error and click Save to record the change.
   3. Click in the Reconcile window or choose Reconcile from the Banking menu to return to the list of items you were marking.
   4. Put a checkmark in the column to indicate that the check is reconciled to your bank statement.
7. If you find a transaction on your statement that is missing from the QuickBooks list, enter the transaction now.
8. When you've finished marking transactions, look at the Difference in the bottom right corner of the Reconcile window:
   • If the Difference is 0.00, click Reconcile Now. You've reconciled the account with your statement.
   • If the Difference is not zero, your QuickBooks account doesn't match your credit card statement. Find and correct as many differences as you can, click Reconcile Now, and follow the instructions onscreen.
9. Decide whether you want to write a check now or enter a bill for later payment through accounts payable. If you choose to pay the bill now, the Write Checks window appears. You can pay all or part of the credit card bill.
10. Click OK.
11. Complete the payment transaction:
    • If this is the first time you are paying this credit card company, enter the name of the credit card company in the "Pay to the order of" field (if you are writing a check), or the Vendor field (if you are entering a bill). For subsequent payments, QuickBooks remembers the name of the credit card company and fills it in for you.
    • If you want to pay part of the amount due, edit the amount that QuickBooks has filled in.
    • Save the transaction.

If you are writing a check, you can have QuickBooks print the check now by clicking Print.