When you enable and perform a bank reconciliation in Guesty's trust accounting solution, you might observe an adjustment being made against both your cash account and, notably, your property manager's ledger.
Before setting up bank reconciliations for the first time, please read the below to understand why these adjustments occur and common reasons for significant discrepancies, such as a large balance showing after initial reconciliation.
What is the reconciliation process?
Guesty's reconciliation process is designed to ensure the cash balance recorded in your system accurately reflects the actual funds held in your bank account for your trust. It works by taking the cash amount listed in your system as of a specific date, factoring in any uncleared transactions (deposits or withdrawals not yet reflected by the bank), and then comparing this calculated system balance against your actual bank balance.
Why are adjustments made?
If there's a difference between your system's calculated cash balance and the bank's balance, the system will perform an adjustment to bring your internal records into alignment with your real-world bank account. Learn more below about different types of adjustments.
Adjustment against the cash account
This is straightforward: The system needs to correct its internal cash balance to match the verified bank balance. If the system thinks you have $X, but the bank shows $Y, an adjustment of ($Y - $X) is posted to your cash account to correct the discrepancy.
Adjustment against the property manager's ledger/account
This is a critical point in trust accounting. The property manager is ultimately responsible for the financial health and integrity of the trust account.
If the reconciliation reveals that there are insufficient funds in the trust account to cover the system's recorded liabilities, or if there's an unexplained surplus or deficit, it is the property manager's responsibility to address this.
Therefore, any adjustment needed to balance the trust account (especially those stemming from unmanaged liabilities or historical discrepancies) is posted against the property manager's ledger. This ensures that the property manager is accountable for replenishing funds if there's a deficit or for managing any unaccounted surplus
Common reasons for large adjustments
A large adjustment, for example a $3 million balance, typically indicates significant historical discrepancies or unmanaged balances within the system prior to the reconciliation process. Following are the most common culprits.
Advanced deposits with departed reservations
Guesty tracks advanced deposits, which are funds collected from guests before their stay. If a reservation has departed but still shows an outstanding balance in "advanced deposits" - meaning more funds were disbursed than were collected or accounted for on that reservation - it creates an inconsistency. The system expects these funds to be held in trust, but they may have already been paid out or never fully reconciled.
Impact on cash balance
If more funds have been disbursed (e.g., to an owner, vendor, or property manager payout) than were collected for a reservation, this will negatively affect the perceived cash balance in the system. The system thinks it should still be holding money that has already left the bank.
Recommendation
Before performing your reconciliation, it is strongly recommended to ensure that all past (departed) reservations are zeroed out in advanced deposits. This might involve manual adjustments or investigating why these balances persist.
Unpaid accounts payables (AP) that have already cleared the bank
Guesty tracks various accounts payables, which are amounts owed to property managers, taxes and VAT, channels, and vendors. If transactions related to these payables have already been paid out, or cleared, from your bank account, but are still marked as "unpaid" in your Guesty system, it causes a major discrepancy.
Impact on cash balance
The system thinks these funds still need to be paid out and, therefore, assumes they are still part of your trust account's cash balance. However, since they've already left your bank, this inflates your system's perceived cash balance relative to your actual bank balance. The reconciliation will then need to reduce the system's cash balance, leading to a large negative adjustment to bring it in line with reality.
Recommendation
Under "Balances", create a payout to record these payments to the different ledgers.
Unpaid owner balances or undisbursed funds
If you have funds due to owners that have not been properly disbursed through the system - they are showing as "unpaid" in the owner disbursement system - the system assumes these funds are still held within the trust. Similarly, incorrect beginning balances for owners or other liability accounts can lead to the system overstating the funds it believes it should be holding.
Impact on cash balance
Like with accounts payables, if these funds are not actually in the bank, perhaps due to incorrect historical entries or prior manual payouts not recorded in Guesty, the system's cash balance will be inflated. The reconciliation will then correct this by making a significant adjustment.
Recommendation
Under "Balances", create a payout to record these payments to the different ledgers.
The importance of correct liability balances
The fundamental principle here is that your trust accounting system should accurately reflect not just your cash, but also all your liabilities - what you owe to owners, vendors, tax authorities, etc.
Having all of your liability balances correct and up-to-date in the system before you begin the bank reconciliation process is crucial. This ensures that the system's calculated cash balance accurately reflects only the funds that should be in the trust to cover known liabilities. When this is done, any adjusting entry made by the system will be minimal and reflect only true timing differences or minor rounding, rather than massive historical discrepancies.
We recognize that large adjustments can be confusing. In the future, to enhance transparency, we plan to introduce a "clearing account." This clearing account will be used for all beginning balances, balance adjustments, and advanced deposit corrections. This will make it much easier to trace and understand how these balance derivations are reached, providing clearer insights into reconciliation adjustments.
In conclusion, a large reconciliation adjustment, such as a $3 million balance, is a strong indicator that your system's liability accounts - advanced deposits, accounts payables, owner balances - need thorough review and correction. By ensuring these balances are accurate before reconciliation, you can minimize large adjustments and maintain a healthy, transparent trust account.
If you encounter a significant adjustment, focus your investigation on these key areas to identify and rectify the underlying data inconsistencies.