How to Reconcile General Ledger Accounts

General ledger (GL) account reconciliation is a fundamental accounting process that ensures the accuracy, completeness, and reliability of an organization’s financial records. It involves comparing the balance of a general ledger account with an independent, external source of information or a related sub-ledger. This verification process confirms that all transactions are accurately recorded and that account balances truly reflect the financial position. Business owners, bookkeepers, and accountants commonly perform these reconciliations to maintain robust financial integrity.

Understanding General Ledger Accounts

General ledger accounts serve as the central repository for all financial transactions within an accounting system. These accounts systematically categorize every financial event, providing a comprehensive overview of a business’s financial activities. The general ledger is the master document from which financial statements, such as the balance sheet and income statement, are prepared.

General ledger accounts fall into five main categories: assets, liabilities, equity, revenues, and expenses. Asset accounts include items like cash, accounts receivable, and inventory, representing what the company owns. Liability accounts, such as accounts payable and loans, show what the company owes to others. Equity accounts reflect the owners’ stake in the business, including common stock and retained earnings. Revenue accounts track income from sales and services, while expense accounts record costs like salaries and rent.

Information and Tools for Reconciliation

Before initiating the reconciliation process, gathering specific documents and reports is necessary to ensure a thorough comparison. External statements provide independent verification and include bank statements, credit card statements, and vendor statements, which detail transactions processed by external entities. Internal reports, generated from the company’s accounting system, are also essential. These include general ledger detail reports, which list all transactions posted to a specific account, and sub-ledger reports for accounts receivable or accounts payable, providing detailed breakdowns of customer or vendor balances.

Most reconciliations are performed at the close of a reporting period, such as monthly, quarterly, or annually. High-volume accounts, like cash, are often reconciled monthly or even daily, while others, such as interest payable, might be reconciled quarterly due to fewer transactions. Information like dates, amounts, and transaction descriptions are crucial for accurate comparison. Common tools for reconciliation range from accounting software features, which often automate matching and flagging discrepancies, to spreadsheets for manual reconciliation, particularly in smaller operations.

Performing the Reconciliation Process

With all necessary information prepared, the reconciliation process involves systematically comparing transactions between the general ledger and supporting records. This comparison aims to match entries that appear in both the GL and the external or sub-ledger records. For example, when reconciling a bank account, each transaction in the company’s cash account within the GL is compared against the bank statement.

Matching entries involves checking off identical transactions based on amount, date, and description. A common aspect of reconciliation is identifying timing differences, which occur when a transaction is recorded in one system but has not yet appeared in the other. Examples include outstanding checks that have been written by the company but not yet cashed by the recipient, or deposits in transit that the company has recorded but the bank has not yet processed. These timing differences are not errors but temporary discrepancies that will resolve themselves as transactions clear.

Documentation of matched items and temporary differences is important for maintaining a clear audit trail. This documentation typically includes original transaction records, notes on discrepancies, and copies of any adjusting entries made.

Investigating and Resolving Discrepancies

When the reconciliation process does not yield a balanced result, it indicates the presence of discrepancies beyond normal timing differences. Common reasons for these imbalances include data entry errors, such as transposing numbers or inputting incorrect amounts, or the miscategorization of transactions. Other causes can be forgotten entries, where a transaction was simply not recorded, or duplicate entries, where the same transaction was entered more than once.

Investigation methods are employed to pinpoint the root cause of these discrepancies. This involves reviewing transaction details, comparing dates, amounts, and descriptions across all records.

Searching for missing entries might require examining source documents like invoices or receipts to find transactions not posted to the general ledger. Verifying amounts involves cross-referencing figures in the GL against original documentation to catch numerical errors. For instance, a check of $761 mistakenly recorded as $767 would create a discrepancy that needs tracing.

Correcting identified errors typically involves making adjusting journal entries. An adjusting entry is a financial accounting entry made to update accounts, correct errors, and reflect proper revenue and expense allocations. For example, if an expense was recorded for an incorrect amount, an adjusting entry would debit or credit the expense account by the difference. If an entry was entirely wrong, it might be necessary to reverse the incorrect entry and then create a new, correct one.

All adjustments made must be thoroughly documented, providing a clear record of the changes and the reasons behind them for future reference and audit purposes.