The general ledger is the master set of accounts that aggregates all transactions recorded for a business. When a person is reconciling the general ledger, this usually means that individual accounts within the general ledger are being reviewed to ensure that the source documents match the balances shown in each account. The reconciliation process is a common activity just prior to the arrival of the auditors for the annual audit, to ensure that the accounting records are in pristine condition.
The reconciliation process at the account level typically comprises the following steps:
- Beginning balance investigation. Match the beginning balance in the account to the ending reconciliation detail from the prior period. If the amounts do not match, investigate the reason for the variance in the prior period. If the account has not been reconciled for some time, it is possible that the error lies several periods in the past.
- Current period investigation. Match the transactions reported in the account within the period to the underlying transactions, and adjust as necessary.
- Adjustments review. Review all adjusting journal entries recorded in the account within the period for appropriateness, and adjust as necessary.
- Reversals review. Ensure that all journal entries that should have reversed within the period have been reversed.
- Ending balance review. Verify that the ending detail for the account matches the ending account balance.
The concept of reconciling the general ledger can also refer to examining the general ledger as a whole to ensure that all accounts are being aggregated into the financial statements. This reconciliation process involves the following steps:
- Summarize the ending balances in all revenue accounts and verify that the aggregate amount matches the revenue total in the income statement.
- Summarize the ending balances in all expense accounts and verify that the aggregate amount matches the expense total in the income statement. This can be conducted at the individual expense line item level in the income statement.
- Summarize all asset, liability, and equity accounts and verify that the aggregate amounts match the respective line items in the balance sheet.
Reconciling the general ledger may also mean the investigation of an unbalanced general ledger, which is when the total of all debits does not match the total of all credits in the trial balance. This process involves investigating debit and credit totals at the individual account level to see which account contains the mismatched debits and credits.