If you work in a finance or accounting department for any business with high transaction volumes or complex flows of funds, you're undoubtedly familiar with the crucial task of general ledger (GL) reconciliation. Managing this process efficiently is vital for maintaining accurate financial records, ensuring regulatory compliance, and supporting informed business decisions.
This post explains how to perform a general ledger reconciliation, including a detailed outline of the GL reconciliation process, best practices, and a practical example to guide you through each step.
General ledger reconciliation process
The general ledger reconciliation process involves several key steps to ensure financial accuracy. These steps include identifying accounts, comparing balances, investigating discrepancies, itemizing reconciling items, and conducting a review and approval. Here, we'll explain each of these steps in detail and the importance of each to help increase confidence in financial reporting.
1. Identify Accounts
First, run a trial balance to ensure that all balance sheet accounts are captured. It's essential to run this each time you reconcile accounts in case new GL accounts were added since the last reconciliation. This initial step sets the foundation by listing all the accounts that require reconciliation, ensuring nothing is overlooked. Because of double entry accounting, if there's an account not being reconciled, it'll show up in another area of the balance sheet. Also, if you run a trial balance and it doesn't net to zero, that's another indicator that balance sheet accounts are missing.
2. Compare Balances
Match the book (or GL) balance to the sub-ledger or an independent source balance. A sub-ledger could be an Accounts Receivable (AR) Aging report or a prepaid expense schedule, while an independent source might be a bank statement. This comparison verifies the accuracy of the GL balance by cross-referencing it with sub-ledgers or third-party documents.
3. Investigate Discrepancies
If the GL and independent source balances don't match, the reconciler must identify the reason(s) for the variance. This step involves a thorough review of transactions to pinpoint errors, omissions, or timing differences that cause discrepancies. Understanding the root cause is essential for accurate reconciliation and future prevention of similar issues. Of equal importance is knowing when the reconciling item first showed up on the reconciliation. Aged rec items create financial exposure and risk to the company.
4. Identify Reconciling Items
Itemize reconciling items, including the date, description, and corrective action required to resolve each item. This documentation provides clear documentation of the adjustments needed to align the GL with the sub-ledger or independent source. Keeping detailed records helps to track progress and ensures that all discrepancies are addressed systematically. Notify other departments of the plan to reconcile rec items so they can update their team's records, too.
5. Review and Approve
After completing the reconciliation steps, the account reviewer will confirm the reconciler's analysis. The reviewer either sends the reconciliation back for further work or signs off to confirm the account's activity as accurate. This final step adds a layer of oversight, ensuring that reconciliations are thorough and errors are caught before final approval.
After understanding the essential steps involved in general ledger reconciliation, it's helpful to see these steps in action. In the following section, we'll walk through a practical example with snapshots to illustrate each phase of the process. This will provide a visual guide to help you apply these steps to your own reconciliation tasks, ensuring accuracy and efficiency in managing your financial records.
General ledger reconciliation example
Here's an example of a standard GL reconciliation template. It should summarize and clearly state what makes up the balance at the end of the period and where to find independent source documents.
The Leadsheet
The GL Balance
After the leadsheet, include an export from the accounting system showing the book balance as of the end of the period.
Independent Source Documents
For each item that makes up your GL reconciliation balance, present them on a separate tab, noting the location of the source documents in case a manager or auditor needs to verify. Instead of hardcoding, link each item on the leadsheet to each item on the independent source document tabs.
General Ledger Reconciliation Best Practices (Tips for Effective Reconciliation)
Always be "print ready." Prepare reconciliation documents in a format that can be easily printed and marked up, as some leadership teams prefer to review physical copies during GL reconciliation reviews. Present the independent source balance first, followed by the GL balance. Adjust the GL to match the source, not the other way around.
Document everything in detail. Keep detailed records of all reconciling items, including dates, descriptions, and corrective actions taken. This ensures a clear audit trail and facilitates easier reviews and future reconciliations.
What counts as independent source documents? It's important to note that a general ledger balance detail query is not considered an independent source document. Independent sources include external documents like bank statements, supplier statements, or AR Aging reports, which provide a higher level of verification for your GL balances.
Present independent source balances first: Always start with the independent source balance, then follow with the GL balance. Adjust your GL to match the source, not the other way around. This approach ensures that your GL reflects accurate, verified data.
Continuously improve: Regularly review and update your reconciliation processes. Seek feedback from your team and stay informed about best practices and new technologies that can enhance efficiency and accuracy.
Communicate with other departments: Sometimes, resolving reconciliation issues requires conversations with other teams. Items may have been inadvertently posted to the wrong GL accounts, causing issues for multiple teams. For example, reconciling AR accounts where something is misposted can create problems for both the accounting and AR teams. Agreeing on the action items needed to resolve these issues is crucial.
How Frequently to Perform GL Reconciliation
The frequency of GL reconciliation is crucial for maintaining accurate financial records. For most businesses, monthly reconciliation is standard practice. However, if your organization handles a high volume of transactions or deals with complex financial flows, you may need to reconcile more frequently, such as weekly or even daily. Regular reconciliations help catch discrepancies early, making it easier to resolve issues and maintain the integrity of your financial statements.
Final Thoughts
Nobody starts out as an expert in general ledger reconciliation. It’s through reviews, feedback, and ongoing process optimization that accounting teams make the most of their reconciliations and build a strong internal controls framework. Following these best practices and tips will help you navigate the complexities of general ledger reconciliation, maintain accurate financial records, and support the financial health of your organization.
