The Trial Balance Report provides us with a lot of important information and is a critical part of keeping your account balanced three ways. It's a snapshot of all files with positive and/or negative balances as of the report date. A regular review of this report by management to identify and resolve any abnormalities is critical.
The review of the Trial Balance should not be limited to reviewing the balances, it should go a step further by reviewing the ledgers and understanding the purpose of each ledger. On occasion, a ledger that cannot be associated with a specific closing (exception ledger) might be found, and these ledgers require a close review to determine the purpose of such ledger and should be zeroed out as soon as possible. These "exception ledgers" are normally identified by a ledger ID that is not within the normal numbering sequence for the office, such as "EXCEPTIONS, MISCELLANEOUS, or TEMPORARY". These ledgers may have been created because an escrow ledger for a bank transaction could not be identified at the time the transaction cleared the bank and a temporary ledger was created in order to post the transaction and clear it. Any transaction(s) that are posted to this type of ledger should be transferred to the correct escrow ledger within 30 days. Unfortunately, these temporary ledgers often become a permanent holding spot for these transactions until the auditors show up.
An auditor reviewing a trial balance with exception ledgers will want the funds in these ledgers to be identified. Transferring funds to the correct ledgers within 30 days is much easier than it would be if you have to research back months or even years. It's likely that there may be another escrow ledger that has an overage or shortage because funds that were not able to be identified at the time they cleared the bank were put in an exception ledger and not moved to the correct escrow ledger. By using an exception ledger and not applying the transaction to the correct ledger quickly, you are creating an issue in two ledgers.
While it's possible to complete the reconciliation of an escrow account where exception ledgers exist, there are transactions that exist that are not appropriately applied to the correct escrow ledgers. Having balances in exception ledgers could subject the organization to additional risk exposure due to the fact that the purpose of the funds is not identified with a specific escrow ledger.
See below for suggested exception ledger guidelines:
- Do not use any form of exception ledger unless it is absolutely necessary and you plan to resolve it right away.
- If you have to create an exception ledger in order to reconcile, be sure to transfer any transactions posted to the exception ledger to the correct escrow ledger within 30 days or less.
- Review your Trial Balance regularly for any ledgers that do not appear to be escrow ledgers and fix them.
- If you have old exception ledgers on your Trial Balance, make it a priority to begin reviewing the transactions now and transfer them to the correct escrow ledger.
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