Home  >  Advocacy

Best Practices

What is a Three-way Reconciliation?

September 4, 2012

By Jonathan Yasko

Three-way reconciliation is the most accurate way of reconciling an account so that every cent is accounted for. The use of adequate, all-inclusive software makes the reconciliation easier and more efficient. All underwriters require three-way reconciliations to be performed each month for each account and maintain the proper reports for audit purposes.

How to Perform Three-way Reconciliation

The basics of the reconciliation consist of your ability to match debits and credits from the bank statement to the reconciliation portion of your software program. Note: All debits and credits assigned to your account from your bank (ex. account analysis fee, check orders, sweep, interest, etc.) must be entered into the software program under a file name so that those transactions may be cleared when you reconcile.

Inside the reconciliation portion of your software, you may be prompted to enter the Ending Bank Statement Date and/or the Ending Bank Statement Balance. Once you have entered in the designated information, then you can begin to clear the items in your software program as listed on the bank statement. After completion of clearing the transactions, you would then need to print the reconciliation. In addition to printing the reconciliation, immediately print the Trial Balance Report to verify that the reconciliation ties.

How It Works

The first part of the reconciliation is the book balance (your checkbook register). The second piece is the Adjusted Bank Balance. The Adjusted Bank Balance is a formula that consists of reports from the reconciliation:

Ending Bank Statement Balance
+ Outstanding Deposits/Wires Report
- Outstanding Checks/Wires Report
= Adjusted Bank Balance

The third and final piece is the Trial Balance, which is a separate report in your software program that must be printed immediately after reconciling. Note: If you do not run the Trial Balance immediately after reconciling, your reconciliation may not tie. If the Book Balance, Adjusted Bank Balance and Trial Balance match, you have a valid three-way reconciliation. If your Trial Balance does not match the Adjusted Bank Balance, you need to go through the items you have cleared to find a transaction that should not have been cleared or a transaction amount that is different from the bank statement/software program. You may also need to clear a transaction that previously had not been cleared from the bank statement. The reconciliation is not valid until all three pieces match to the penny.

Reports To Be Retained

A three-way reconciliation consists of five pieces of vital information. These reports must be retained for each account, each month for seven years. The complete reconciliation must contain at minimum the following:

1. Software-generated “Reconciliation Summary Report”
2. Software-generated “Trial Balance Report”
3. Software-generated report of all “Outstanding Deposits/Wires”
4. Software-generated report of all “Outstanding Checks/Wires”
5. A complete copy of the month’s Bank Statement
6. Software-generated "Cleared Items Report"

Using the Reconciliation as a Tool

The reconciliation can be considered as a snapshot in time of the health of your operation. The reconciliation should be used as a tool to help avoid monetary losses due to the many pitfalls that exist in today’s business environment. The following reports should be reviewed after the reconciliation has been completed for items that need follow-up:

Trial Balance:

• Files with negative balances should be reviewed and the cause of the shortage should be documented in the file.
• Any file shortages greater than 30 days should be funded from operating immediately. Once the funds are collected from the responsible party, the operating account can be reimbursed.
• Files with balances greater than six months old, should be reviewed and funds disbursed to the appropriate parties.

Outstanding Deposits/Wires Report:

• All outstanding deposits greater than 72 hours should be immediately reviewed to determine why the funds remain outstanding.
• The party from which the funds are due should be contacted and documentation of this correspondence should be kept in the file.
• Any outstanding deposits greater than 30 days should be immediately funded from operating. The agent can then collect the funds from the proper party and reimburse the operating account.

Outstanding Checks/Wires Report:

• All outstanding checks should be reviewed for lienable items (i.e. mortgage payoff, taxes, insurance, etc.).
• All checks over 90-days old should be reviewed as to their status.
• All follow-up should be documented and copied to the file.

Jonathan Yasko is a managing member of Entrust Solutions. He can be reached at jyasko@goentrust.com.