How to Do General Ledger Reconciliation

General ledger reconciliation is a fundamental accounting process that ensures the accuracy and reliability of an organization’s financial records. It involves comparing the balances in a company’s main accounting record, the general ledger, with information from external sources or subsidiary ledgers. This process verifies that all financial transactions are accurately recorded and that financial statements truly reflect the company’s financial position.

Understanding Essential Elements for Reconciliation

The general ledger serves as the central repository for all financial transactions, providing a comprehensive record of a company’s financial position. It organizes financial activities into categories such as assets, liabilities, equity, revenues, and expenses. Reconciliation confirms that balances within this central record align with external documentation or detailed subsidiary ledgers, ensuring data integrity and aiding in error detection.

Accounts commonly subject to reconciliation include cash, accounts receivable, accounts payable, inventory, fixed assets, and various accrued or prepaid expenses. For cash accounts, the general ledger balance is compared against bank statements to identify differences like outstanding checks or deposits in transit. Accounts receivable balances are reconciled with subsidiary ledgers detailing amounts owed by individual customers, often reviewed against customer statements or aged receivables reports.

Accounts payable balances are verified by comparing the general ledger amount to vendor statements or subsidiary AP ledgers, ensuring all vendor obligations are accurately recorded. Inventory balances are reconciled with physical inventory counts or perpetual inventory records, confirming the quantity and value of goods on hand. Fixed asset balances are compared against a detailed fixed asset register, which tracks individual assets, their cost, and accumulated depreciation.

Accrued and prepaid expenses, representing obligations incurred but not yet paid or payments made for future benefits, are reconciled against supporting schedules or agreements. Supporting documentation for these reconciliations includes bank statements, customer invoices, vendor bills, payroll records, physical count sheets, and detailed contracts or agreements.

Executing the General Ledger Reconciliation Process

The general ledger reconciliation process begins with obtaining the necessary records for the specific accounting period. This involves pulling the general ledger trial balance, which summarizes all account balances, alongside corresponding external or subsidiary records like bank statements or vendor statements.

The next step involves comparing the ending balance of the general ledger account with the corresponding external or subsidiary record for the same period. If balances do not align, further investigation is necessary.

Once differences are identified, the process moves to investigating their root cause. Common reasons for variances include timing differences, such as deposits not yet processed by the bank or checks not yet cleared. Errors are another frequent cause, ranging from data entry mistakes to transactions recorded in the wrong account or duplicated entries. Missing transactions, such as unrecorded payments or invoices, can also lead to imbalances. Tracing individual transactions and reviewing entries helps pinpoint the exact source of the difference.

After discrepancies are identified, adjusting entries are prepared to correct the general ledger. These entries bring the general ledger balance into agreement with the verified external or subsidiary balance, ensuring financial records accurately reflect the company’s position.

These entries must then be posted to the general ledger, updating the affected account balances. This step formally incorporates the corrections into the company’s financial records.

A final verification step is performed, where the account is re-reconciled after all adjusting entries have been posted. This ensures the general ledger balance precisely matches the external or subsidiary record.

Ensuring Ongoing Reconciliation Accuracy

Maintaining accurate reconciliations requires consistent practices and adherence to established schedules. The frequency of reconciliation depends on the account’s transaction volume and risk profile; high-volume accounts like cash are sometimes reconciled daily, while most others are reconciled monthly. Establishing a regular rhythm helps in promptly identifying and resolving discrepancies.

Comprehensive documentation and meticulous record-keeping are essential for each reconciliation. This includes retaining reconciliation worksheets, supporting schedules, copies of all adjusting entries, and clear explanations for any identified discrepancies. Documentation should also include the date of reconciliation and the initials of both the preparer and reviewer, creating a transparent audit trail.

An independent review and approval process is another control for maintaining accuracy. A supervisor or qualified individual should independently review completed reconciliations. This oversight helps catch potential errors, ensures compliance with internal policies, and adds assurance regarding financial data reliability.

Recurring discrepancies identified during reconciliation offer valuable insights for improving underlying accounting procedures. Analyzing these patterns can lead to enhancements in data entry protocols, clearer communication, or opportunities for automating processes. This feedback loop helps refine financial operations and bolster overall data integrity.