What Is a General Ledger Reconciliation?

General ledger reconciliation is an accounting process that ensures the accuracy and completeness of a company’s financial records. It involves comparing the balance of an account in the general ledger to corresponding external records, such as bank statements, or internal sub-ledgers. This verification process confirms that recorded transactions are valid and accounted for correctly, supporting the integrity of financial data. Regular reconciliation helps maintain reliable financial records.

Understanding General Ledger Reconciliation

A general ledger serves as the master record for all financial transactions within a business. It aggregates data from various journals and sub-ledgers, classifying transactions into categories such as assets, liabilities, equity, revenues, and expenses. The general ledger is the primary source for financial statements, including the balance sheet and income statement.

Reconciliation verifies the accuracy and completeness of this financial data, ensuring general ledger balances reflect the company’s true financial position. It acts as an internal control, helping to detect errors, prevent fraud, and assure financial statement reliability. Without regular reconciliation, unnoticed errors could lead to incorrect account balances, misrepresenting the company’s financial health. This process is often performed monthly, quarterly, or annually, helping maintain transparency and compliance with accounting standards.

Common Accounts Requiring Reconciliation

General ledger accounts routinely undergo reconciliation, as they typically have corresponding external documents or detailed internal sub-ledgers for comparison.

Cash and Bank Accounts: Reconciled by comparing the general ledger cash balance with bank statements. This bank reconciliation identifies timing differences (e.g., outstanding checks, deposits in transit) and bank errors.
Accounts Receivable: Compares the total amount owed by customers in the general ledger to a detailed list of individual customer balances. This ensures accurate recording of customer payments, preventing missing payments or duplicate entries.
Accounts Payable: Compares the total amount owed to suppliers in the general ledger with a detailed list of individual vendor balances. This helps identify discrepancies like incorrect pricing or duplicate invoices, ensuring timely payments.
Inventory Accounts: Reconciled by verifying the general ledger balance against physical counts or perpetual inventory records. This confirms accurate recording of inventory transactions and correct reported value.
Fixed Asset Accounts: Reconciled by comparing general ledger balances to an asset register. This ensures recorded asset values, including depreciation, align with actual holdings.
Accruals and Prepayments: Require reconciliation to ensure these timing-related entries are accurate. Verification against supporting documentation is important for these estimated or deferred revenue and expense accounts.

The Reconciliation Process

General ledger reconciliation involves a structured series of steps to compare financial records and identify differences:

Gather Documents: Collect all necessary documents for the account and period, including the general ledger trial balance, bank statements, sub-ledger reports, and supporting documents like invoices.
Compare Balances: Compare the general ledger account’s ending balance with its corresponding external or sub-ledger balance.
Identify Matched Transactions: Systematically mark off transactions appearing on both records.
Pinpoint Unmatched Items: Identify transactions present on one record but not the other, or where amounts differ.
Investigate Discrepancies: Determine the root cause of each difference, such as timing differences, data entry errors, or missing transactions.
Prepare Reconciliation Statement: Create a formal statement summarizing the process, detailing starting balances, additions, deductions, and the reconciled balance. This document serves as a record of verification and needed adjustments.

Addressing Discrepancies

Addressing discrepancies promptly is necessary for accurate financial records. After differences are identified, investigate the underlying cause by examining supporting documentation and tracing transactions.

Discrepancies often stem from timing differences, such as outstanding checks or deposits in transit, or errors like incorrect amounts, duplicate entries, or missed transactions. Bank errors are less frequent.

Once the root cause is determined, take corrective actions. For errors within company records, make adjusting entries in the general ledger to correct the account balance. If an external party’s error, contact them for correction.

Document all identified discrepancies and their resolutions. This creates a clear audit trail, providing evidence of the reconciliation and how each difference was resolved, assisting with future reconciliations and audit compliance.