General ledger reconciliation is a critical finance process that ensures the accuracy and consistency of a company’s financial records by comparing the general ledger balances to external documentation or subsidiary ledgers. This process helps identify and resolve discrepancies, ensuring that financial statements reflect the true financial position of the organization.
General ledger account reconciliations are part of a larger internal controls framework designed to detect issues in a company's financial statements like errors, omissions, or fraud.
This comprehensive piece on general ledger reconciliations covers the essential processes involved in GL reconciliation, different types, common challenges that accountants encounter when performing general ledger reconciliation, and the benefits of automating reconciliations.
What is a General Ledger?
A general ledger (or GL) is a comprehensive listing of financial statement accounts that a company uses to categorize business transactions. It’s also what people are usually referring to when they reference “the book” or “the books.”
A company's general ledger can have any number of accounts and often lists income statement accounts first, followed by balance sheet accounts, though it can also be the other way around. A general ledger can have as many accounts as needed and can be simple or complex.
Some companies have a straightforward G/L with one account for each category: revenue and expenses on the income statement, followed by cash, credit cards, loans, and equity on the balance sheet.
Conversely, larger organizations may have more intricate general ledgers with parent/child relationships where several sub-accounts roll up to a larger account. For example, a company may have "child" accounts called Trade Receivables, Income Tax Receivable, and Other Receivables that roll up to a "parent" account called Accounts Receivable. Businesses often have accounts for even more specific items like prepaid expenses and sales tax liabilities.
What is General Ledger Reconciliation?
General ledger reconciliation is a standard process in accounting to compare activity on the company's books to activity from independent source documents for the same period.
For example, a company reviews its cash balance at the end of May in comparison to the bank statement for the same period. Ideally, the balances should be the same, but due to timing and sometimes errors or fraud, the balances don't match.
Using the bank account example, assume the company paid bills totaling $12,547.22 on the last day of the month that didn't clear the bank until the following month. The company's book balance is $12,547.22 lower than the bank statement balance because the bank won't know that these bills were paid until the following month. When reconciling the account, the reconciler should itemize the $12,547.22 by vendor and purpose and note these as reconciling items due to timing.
When the company receives the June bank statement, the $12,547.22 will show up there and this matching will clear the reconciling items the following month. The value in the general ledger reconciliation process comes from identifying these discrepancies and taking action to correct as needed.
Types of General Ledger Reconciliations
General ledger reconciliations fall into three categories: assets, liabilities, or equity. Each general ledger reconciliation corresponds to a balance sheet account, having the same GL account number and name.
Companies have varying general ledger reconciliations, but many are standard, including:
- Bank Reconciliation: A bank reconciliation is done for each bank account to reconcile the company's GL balance to the bank statement. It's normal for bank recs to have reconciling items because of timing differences, like outstanding checks, bank service fees, or pending deposits.
- Accounts Receivable Reconciliation: This rec ties the A/R balance to the sub-ledger, called the A/R Aging Report, to ensure all customer invoices, payments, and credit memos are captured on time and accurately.
- Fixed Assets Reconciliation: This rec ties property, equipment, furniture, and depreciation balances to the fixed assets subledger. The fixed asset sub-ledger tracks the acquisition, depreciation, transfer, and disposal of fixed assets.
- Accounts Payable Reconciliation: This rec ties the GL balance to the AP sub-ledger, the AP Aging Report, to accurately capture money owed and paid to suppliers.
- Payroll Reconciliation: This can be one consolidated rec or broken out by Salaries & Wages, Payroll Taxes, 401K, Medical, and others. This account reconciliation ensures payroll-related expenses and liabilities are recorded in a way that’s consistent with payroll reports.
- Debt Reconciliations: These general ledger reconciliations specify long-term amounts owed to others (i.e. Notes, Mortgage, Interest Payable) and tie debt balances in the general ledger to creditors' account statements.
- Equity Reconciliations: This is where the owners' net worth is agreed to accumulated income or deficits. The equity reconciliations are where the company's net income (or loss) is closed from the Income Statement which includes operating income, gains & losses, and dividends. It will also include other equity items such as owner capital investments and share-based compensation expenses.
How Do You Perform a General Ledger Reconciliation?
Performing a general ledger reconciliation involves several steps:
- Identify Accounts: First, run a trial balance to ensure all balance sheet accounts are captured. Run this each time you reconcile accounts in case new GL accounts were added since the last time you reconciled.
- Compare Balances: Match the book (also called GL) balance to the sub-ledger or independent source balance. A sub-ledger could be an AR Aging or prepaid expense schedule, while a bank statement is an independent source document.
- Investigate Discrepancies: If the GL and independent source balances don't match, the reconciler must identify the reason(s) for the variance.
- Identify Reconciling Items: Itemize reconciling items including the date, description, and corrective action to take to resolve.
- Review and Approve: After the reconciler completes these steps, the account reviewer will confirm the reconciler's analysis and either send it back to the reconciler for additional work or sign off to confirm the account's activity as accurate.
Monthly Reconciliation of General Ledger Accounts
Accountants perform general ledger reconciliations each accounting period, usually monthly, quarterly, or annually. Typically, accounts are reconciled monthly, but frequency varies depending on factors like transaction volume or management's assessment of risk for that specific account.
Bank accounts that receive customer payments can be reconciled daily due to high volume, while an interest payable account gets reconciled quarterly because there's only a few transactions posted each month.
Why You Should Automate General Ledger Reconciliation
The volume of transactions that flows through a business each period can be overwhelming to track manually. With Excel, managing a large amount of data becomes burdensome and increases the risk of errors and typos. Automating the general ledger reconciliation process minimizes the risk of these errors while making reconciling accounts a more efficient process.
Imagine having an automated reconciliation solution that automatically matches and categorizes transactions, thereby eliminating the manual process. Automating reconciliations can significantly reduce the risk of fraud and errors, while also freeing up accountants to focus on higher-value tasks that contribute to strategic business decisions.
Frequently Asked Questions (FAQs) About General Ledger Reconciliations
What is the purpose of general ledger reconciliation?
General ledger reconciliation ensures that the financial statements are accurate and complete by verifying that the transactions recorded in the books match independent source documents.
What are common issues found during general ledger reconciliation?
Common issues include timing differences, data entry errors, unauthorized transactions, and unrecorded transactions. Identifying and resolving these discrepancies is crucial for maintaining accurate financial records and strong internal controls.
How can automation improve the reconciliation process?
Automation streamlines the reconciliation process by reducing manual data entry, minimizing errors, and allowing for faster identification and resolution of discrepancies. This frees up accounting staff to focus on higher value-add activities.
What is the difference between the general ledger and a sub-ledger?
The general ledger is a comprehensive listing of the accounts a company uses to record business transactions. A sub-ledger is a module within an accounting system that tracks activity specific to transactions, such as customer invoices and payments, vendor bills, and fixed assets. Each sub-ledger tracks individual transactions that make up the total general ledger account balance.
What tools are available for general ledger reconciliation?
An automated solution like Ledge automates high-volume transaction matching, even across many different sources and for complex one-to-one, one-to-many, many-to-one, and many-to-many transaction scenarios.
It uses AI and machine learning models to automatically match settled payments to the corresponding source, whether it’s the invoice, database, bank, PSP, or ERP. This includes partial payments, refunds, chargebacks, payment failures, and payments that cover multiple invoices (or vice versa, one invoice that’s attached to multiple payments.)
Final Thoughts
Reconciling general ledger accounts is a key detective control in a company's internal controls framework. Think of reconciling the general ledger as confirming what should have happened (on your books) with what actually happened (independent source documents).
This ensures that the assets tie to the liabilities and equity and that any potential fraud or collusion is minimized. It's a critical process for maintaining the integrity of a company's financial reporting process, and once your business is operating at scale – whether it’s managing high volumes of transactions or complex finance operations, or both – then it’s definitely something you need to look into automating.
