The current times in accounting practice more and more often bring us situations when entrepreneurs and companies need accounting reconstruction. The reasons for this are varied, ranging from poor quality work by former bookkeepers, to loss of data, to doubts about the completeness and accuracy of the accounts. This may also be due to disputes between partners.
Reconstruction of accounts is very demanding and laborious, so careful planning and piecemeal implementation is essential. Communication between the client and the accounting firm is very important.
What is available for accounting reconstruction
The first thing to do is to find out what documents are available and whether everything will be re-entered into the accounting software as part of the reconstruction, or whether there will be any data entered. This could be done by reconstructing a database that the company may have stored.
A list of primary documentation needs to be compiled at the outset. This means securing the primary documents that are available. Then check that these primary documents are entered in the accounts in the correct period and amount. If necessary, correct or complete the documents.
If necessary, carry out a complete physical inventory of the monetary assets, checking the calculation of their balances.
The use of the tax information box simplifies work
It will be important to provide copies of documents that are submitted to government institutions. Most often, these are filed tax returns and summaries relating to payroll deductions. Nowadays, every individual and legal entity can have a registered tax information box where they can find all their tax-related submissions. Insurance companies also have information servers for their taxpayers.
If required, copies of all leases, loans, sales, purchase and insurance contracts must be obtained. Invoices, credit notes and credits can be obtained from suppliers and customers. By taking an inventory of accounts payable and accounts receivable, we can identify any missing documents or discrepancies in the amount of accounts receivable and accounts payable or the complete absence thereof.
We will obtain bank statements from the bank and, where applicable, all loan agreements.
Reconstruction means putting together the entire accounts, including payroll
If the company has employees, we will request payroll documents again, i.e. monthly recapitulations, tax and insurance reports.
In order to start the reconstruction, we need to enter and set up the initial balances of the accounts and ledgers. By ledgers we mean most commonly the accounts payable and accounts receivable ledger. We can verify the ending balances of the previous period by checking with filed tax returns, checking credit and bank statement balances, and possibly mail or letters of confirmation.
Most invoices received and issued are paid using bank accounts. So we then enter the bank movements and see which are not paired with the document. Of course, not every payment is a payment of a liability or receivable. We then continue to account for internal transactions such as bank charges, transfers between company accounts or cash deposits and withdrawals.
The biggest challenge tends to be the reconstruction of the cash register
Probably the most difficult part is putting the cash register back together, because if the initial documents are lost, it is often very difficult to retrieve them and remember what the cash movements were. You need to look to see if any invoices have been paid in cash, if the cash book has been printed or downloaded to a file somewhere. VAT records could be helpful if the company is a taxpayer and a deduction has arisen.
Once the work to restore the cash register is complete, the book balance needs to be checked against the physical balance and any surplus or shortfall dealt with. In most cases, the surplus could indicate unreceived sales or loan, shareholder deposit, etc. On the other hand, a shortfall is likely to be due to a failure to track down all the necessary documents. In order for the books to remain in order, the accounting and the physical condition of the cash register must be identical.
This is the procedure for all agencies. Accounts payable, accounts receivable, internal documents, bank, cashier, payroll…
Let’s not forget the asset balances
Assets and inventories will also be an important part of the reconstruction. As we have already mentioned, a physical inventory of assets and inventory is needed. But also a documentary one, so that we know what our balances consist of. We also need to correctly enter the individual asset cards, their depreciation and residual values when entering the opening balances for the assets. To do this, we can use previous years’ inventory lists, which we need to compare (and reconcile) with the balances in the accounts.
Each account in the balance sheet can be checked. Cash and stock by physical inventory, bank by bank statement, share capital by extract from the Companies House, tax balances by tax returns and payables and receivables by checking with trading partners. It is therefore necessary not to forget any of them.
An important part of the reconstruction are measures to prevent the same situation in the future
At the end of the entire reconstruction, guidelines, accounting methods and a management report are prepared which describes the reconstructed accounting and also summarises what is needed to prevent this unpleasant situation from happening again.
There will of course be inventories of accounts, revised calculations, tax returns, tax, social security and health insurance statements.
The complexity of the whole reconstruction will depend on the delivery of the documents and the number of them, on the sheer size and complexity of the accounts. It will depend on the possibility of ensuring the recovery of the database. Our aim is to provide an honest, true picture of the accounts and to ensure that all submissions are correct and complete. We are happy to advise on all aspects of reconstruction and we can help you too.