How to reconcile the general ledger
/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.
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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.
Common Reconciliation Errors
There are several problems that can arise when conducting a general ledger reconciliation. The main problems are noted below:
Timing differences. Verify that the date ranges used in your detailed account reports cover the correct period. You may be looking at the wrong period entirely, or one that runs through the current date (which may not be the end of the reporting period). The result will be endless floundering as you reconcile the wrong time period.
Journal entry mistakes. Any journal entry can contain an error, and especially ones that did not use a standardized template. An entry might have been inadvertently flipped between a debit and a credit, or perhaps the wrong account number was used - or both at the same time. Or, a numeric entry might have been transposed.
Duplicate entries. When more than one person is authorized to create journal entries, it is possible that both of them will create the same entry. It is also possible that just one person will do so by mistake, especially if he or she is not working from a standardized list of journal entries that must be created at the end of each reporting period. In effect, a high level of disorganization equates to more duplicate entries in the general ledger.
FAQs
How are reconciliation adjustments recorded?
Reconciliation adjustments are recorded through journal entries in the general ledger to correct discrepancies identified during the reconciliation process. Each entry should include the appropriate debit and credit accounts, a clear description of the adjustment, and a reference to supporting documentation. These entries must be reviewed and approved to ensure accuracy and maintain a proper audit trail.
How frequently should general ledger accounts be reconciled?
Most general ledger accounts should be reconciled monthly as part of the financial close process to ensure accurate financial reporting. High-risk or high-volume accounts, such as cash or payroll liabilities, may require weekly or daily reconciliation. Low-activity accounts may be reconciled quarterly, provided adequate monitoring controls remain in place.
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