General Ledger Reconciliation

General ledger reconciliation is the process by which business accountants verify that the information in the general ledger is accurate.

A general ledger is an accounting record that compiles all financial transactions and balances for a business. It is a master document that is used to produce other accounting records, in particular, financial statements like the balance sheet, income statements, and statement of cash flows.

Reconciling accounts in the general ledger is a critical control that assures the accuracy and completeness of account balances in the general ledger. A general ledger reconciliation is the process of confirming that the information in an account is accurate and complete by comparing the account balance to the individual transactions that make up the balance. To do this, accountants must access the source of the transaction and verify that the information is correct.

A general ledger reconciliation, like all other forms of reconciliations, is typically performed at the close of a reporting period, such as the month, quarter, or year.

The general ledger is organized into 5 account categories that can contain numerous subaccounts:

1. Assets

2. Liabilities

3. Equity

4. Expenses

5. Income or revenue

Accounts within each category are referred to as subledgers or subledger accounts. For example, assets may include a cash account, accounts receivable, inventory, and fixed assets. Each of these accounts will need to be reconciled to ensure the completeness and accuracy of the balance.

All reconciliations, including those applied to the general ledger, follow the same basic steps:

1. Identify the general ledger accounts to be reconciled.

2. Gather all the necessary details, including the individual transactions that should compose the account balance directly from their source (e.g., the credit card or bank statement).

3. Reconcile transactions. Perform a comparison of the individual transactions to the general ledger balance and identify any discrepancies. In a perfect word, transactions would reconcile to the general ledger, but there may be discrepancies.

4. Investigate discrepancies and determine follow-up action. If discrepancies are identified, the accountant must determine the root cause of the discrepancy and any remediation that should be taken to correct the account balance. Possible causes for discrepancies can result from human error, timing, or even something malicious, like fraud. If remediation is not needed, the accountant will identify the discrepancy as an open item and will need to follow up on that item before the next reconciliation cycle.

5. Prepare and post adjusting journal entries. After determining remediations, an adjusting journal entry to the ledger may be required to close out any discrepancies.

6. Retain documentation. Completion of the account reconciliation process includes the retention of all documentation related to the process. This is a critical control as it allows employees and auditors to review the results of the reconciliation at any point in the future.

The general ledger serves several important functions for the business.

For example, it allows the business to produce financial statements, like income statements and the balance sheet, which provides detailed information for accountants, managers, and investors to make informed analyses about the business and its performance.

Therefore, it is also important that the information contained in the general ledger is accurate and reliable. Reconciliations ensure the integrity of the general ledger in several ways:

• Maintain the accuracy of the general ledger. Substantiating all transactions against supporting documents and the process of identifying and adjusting for discrepancies ensures that all transactions within the general ledger have been verified and reported correctly.

• Prevent errors. By performing reconciliations on a regular, timely basis, businesses can identify the source of errors and correct them before they become compounded or recurring, which could further erode the integrity of the ledger and corresponding financial reports.

• Identify theft, fraud, and poor spending practices. Discrepancies can sometimes be caused by theft or fraud by employees, vendors, or customers. Reconciliations performed at regular intervals can help the business address the activity before it does any more harm.

• Identify trends within accounts.

There are many different types of general ledger reconciliations. They will vary with the accounts and transactions that are being reconciled.

Examples:

• Bank reconciliations: reconciling bank transactions will involve the comparison of ledger transactions with the same transactions recorded in statements from the bank.

• Credit card reconciliations: an analysis of accounts where credit card purchases are recorded will be performed by comparing those transactions with the same transactions reported on credit card statements.

• Accounts receivable: ledger transactions are reconciled against transactions documented on customer statements.