You can write off an unreconciled difference only when it is small, below a threshold your policy sets in advance, and still unexplained after a documented search. Someone other than the preparer approves it. The entry moves the amount from cash to a named expense or income account, and a memo records the search.
When can you write off an unreconciled difference?
An unreconciled difference is the amount left between the adjusted bank and book balances after every identified item is listed. You can write it off when four conditions all hold: it is under your threshold, it has been searched for, it is not part of a pattern, and someone independent approves. If any one fails, keep the item open.
Each condition protects against a different risk:
- Small, against a written threshold. A threshold set before the month, not chosen to fit the gap, keeps write-offs from becoming a way to close any month.
- Searched for, with the search written down. The note should show which tests you ran, so a reviewer can tell an honest dead end from a skipped step.
- Not recurring. A difference that comes back every month, or grows, has a cause. Writing it off each time hides that cause and adds up.
- Approved by someone else. The person who prepared the reconciliation should not approve their own write-off.
Timing matters too. Write off at the end of the month in which the search ended, not months later when the trail is cold. If you find yourself writing off items from a year ago, that is a separate cleanup job with its own method, described in cleaning up old reconciling items for good.
Write-off thresholds and approval for reconciliation gaps
A write-off threshold is the largest unexplained amount a policy allows you to clear without further work. It should be written into the reconciliation policy as a fixed figure, a percentage, or both, with a named approver for amounts under it and a different route for amounts over it.
No single number fits every entity. A household account and a company with millions in monthly receipts tolerate very different amounts. The table below is an example of how a small firm might set tiers. Your own figures should come from your materiality judgment and your reviewer.
| Unexplained amount (example tiers) | Who may approve | What else is required |
|---|---|---|
| Up to $5.00 | Reviewer who did not prepare the reconciliation | Memo on the reconciliation |
| $5.01 to $100.00 | Controller or engagement manager | Memo plus a list of tests performed |
| Over $100.00 | Not written off | Keep researching; escalate to the owner or partner |
Two rules make thresholds work. Apply them to the absolute value, so a shortage and an overage are treated the same. And apply them per account per month, not to a running total, so a run of small write-offs cannot pass unnoticed. A cumulative report of write-offs per account, reviewed each quarter, catches the pattern a monthly check misses.
The journal entry for a reconciliation write-off
The journal entry for a write-off moves the unexplained amount out of the cash account and into a named account in the income statement, dated in the month being reconciled. A shortage, where the books show more cash than the bank supports, is an expense. An overage, where the books show less, is other income.
Use a dedicated account such as "Reconciliation differences". Do not post to suspense, to owner's equity, or to an account that someone reviews less often. A dedicated account lets anyone see the year's total at a glance.
Example entries
The amounts are examples.
A shortage of $3.42: the books show $3.42 more cash than the adjusted bank balance.
| Account | Debit | Credit |
|---|---|---|
| Reconciliation differences (expense) | $3.42 | |
| Cash, operating account | $3.42 |
An overage of $1.80: the books show $1.80 less cash than the adjusted bank balance.
| Account | Debit | Credit |
|---|---|---|
| Cash, operating account | $1.80 | |
| Reconciliation differences (other income) | $1.80 |
Once the entry is booked, the item leaves the reconciliation's list of unexplained differences. It does not become a reconciling item carried forward. If the cause turns up later, reverse the write-off and book the real transaction, so the year's total in the account stays honest.
A difference you can name is not unreconciled. If research shows the gap is a check that cleared for a few dollars more than written, book the check correctly instead of writing off the gap; the steps are in what to do when a check cleared for a different amount.
What should a reconciliation write-off memo say?
A reconciliation write-off memo is the short note that travels with the entry and the reconciliation. It should let a reviewer, a year later, see what the difference was, how hard someone looked, who agreed to clear it and why that was reasonable. Without it, the entry is indistinguishable from a plug.
Include each of these:
- Account, statement period and the exact amount, with its direction (shortage or overage).
- The month the difference first appeared, and whether it appeared before.
- The tests performed, such as footing the statement, matching every line, checking for amounts divisible by 9 and twice any reconciling item, and comparing daily balances.
- The time spent, in rough terms.
- The policy threshold that applies and confirmation the amount is under it.
- The approver's name and the date of approval.
- The journal entry reference.
Keep the memo short. A list of tests with a tick against each is enough. Its job is to make the decision checkable, not to argue for it.
When an unreconciled difference must not be written off
An unreconciled difference must not be written off when its pattern points to something other than a small error: theft, an unrecorded account, or a control failure. In those cases the write-off would bury the evidence. Hold the item open and investigate, or bring in someone independent of the reconciliation.
Watch for these signals:
- The same preparer has write-offs every month, each just under the threshold.
- Shortages only, never overages. Honest keying mistakes tend to fall both ways over time.
- The difference grows month after month instead of staying roughly constant.
- Round amounts, such as $50.00 or $100.00, which look more like withdrawals than keying slips.
- The preparer also handles cash or approves payments. A person who can move money and also explain gaps away should not be the only one reviewing them.
If several of these line up, a forensic review may be justified. The scope, and therefore the fee, depends on how many months and accounts are involved; what drives the cost is set out in forensic accountant cost and what affects it. A narrow, well-defined question about one account is much cheaper to answer than an open request to find whatever is wrong.
PreciseBankFlow is built to list every unexplained difference as an exception with its supporting lines, and never to adjust it to fit, so the record a reviewer approves against is already in the export. Firms can request early access.