How to Reconcile the General Ledger
Reconciling the general ledger involves matching the balance of each account in the general ledger with corresponding information (such as bank statements, credit card statements, or sub-ledger accounts). This is an important process because it helps ensure the accuracy of financial reporting, detect any potential errors, discrepancies or fraud, and maintain the integrity of financial records.
Here are the steps to reconcile a general ledger:
- Identify Accounts to Reconcile: Identify the accounts you need to reconcile. Usually, these include all asset, liability, and equity accounts.
- Gather Documentation: For each account, gather the appropriate documentation that corresponds to the account balance. For example, for a bank account, this would be a bank statement; for an accounts receivable or payable account, it might be an aged receivables/payables report.
- Compare Balances: Compare the balance of each account in the general ledger with the corresponding documentation. If the balances match, that account is reconciled.
- Identify Discrepancies: If the balances do not match, identify any discrepancies and investigate them. This could involve checking individual transactions, reviewing account entries, and so on.
- Resolve Discrepancies: Resolve any discrepancies by making necessary adjustments to the general ledger. This could involve correcting data entry errors, adjusting for accruals or deferrals, or other adjustments.
- Review Financial Statements: Review the financial statements to ensure they reflect the reconciled balances of the general ledger accounts.
- Document the Process: Document the entire reconciliation process, including the initial balances, any discrepancies, the investigations and resolutions, and the final balances. This documentation can serve as a reference for future audits and can help identify trends or recurring issues.
- Implement Controls: Implement controls to prevent discrepancies in the future. This could include improving data entry procedures, training staff, implementing better oversight or review procedures, etc.
Reconciliation should be done regularly (monthly is common) to maintain the accuracy and reliability of the financial records and reports. The frequency depends on the size and complexity of the business operations.
Example of How to Reconcile the General Ledger
Let’s walk through an example of reconciling a business’s bank account, which is a common general ledger account to reconcile:
- Identify Accounts to Reconcile: Let’s say the business identifies its main operating bank account as one that needs to be reconciled.
- Gather Documentation: The business gathers its latest bank statement, which shows a closing balance of $20,000.
- Compare Balances: The business then compares this with the balance of the bank account in its general ledger, which shows a balance of $19,000.
- Identify Discrepancies: Clearly, there’s a discrepancy of $1,000 between the bank statement and the general ledger.
- Resolve Discrepancies: To resolve this discrepancy, the business reviews all the transactions for the bank account in the general ledger and the bank statement. It finds a deposit of $1,000 that has been recorded in the general ledger but hasn’t yet been reflected on the bank statement, as it was made towards the end of the month. This is a timing difference and is a common discrepancy when reconciling bank accounts. Once the deposit is processed by the bank, the general ledger and bank statement will match.
- Review financial statements: The business then reviews its financial statements to ensure they accurately reflect the reconciled balance of the bank account.
- Document the Process: The business records the details of this reconciliation, noting the initial balances, the discrepancy, the resolution, and the final reconciled balance.
- Implement Controls: To better manage timing differences in the future, the business decides to make deposits earlier in the month and to regularly compare the bank statement with the general ledger throughout the month, not just at month-end.
In this example, the reconciliation process helped the business understand why there was a difference between its bank statement and general ledger, and confirm that its records were accurate.