General ledger reconciliation ensures accurate financial records. It involves comparing records and correcting discrepancies. Checks and balances prevent fraud. Cash reconciliation and trial balance are important elements. Reconciliation should occur frequently, and errors should be recorded separately.
General ledger reconciliation is a critical step in ensuring that an organization’s financial activities have been properly recorded, so that the organization’s financial statement can be trusted as an accurate reflection of its financial condition. Reconciliation itself refers to comparing different records in order to ensure that the figures are accurate and in agreement, and when they are not, to bring them into agreement. Similar to reconciling your personal checkbook, reconciling the ledger involves verifying that all of your organization’s transactions during the period were properly posted. The reconciliation of a general ledger, of course, is much more complex and often computerised; even so, reconciling a large company’s general ledger can sometimes take days.
The first step in the general ledger reconciliation process is to ensure that the reconcilers are not involved in posting your accounts. Having a system of checks and balances is essential to prevent fraud or misappropriation. Likewise, a permanent and concurrent record of all transactions should be maintained. For example, all income must be promptly recorded and deposited in the bank daily. The differences between the amounts deposited with the bank and the income can simply be clerical errors, but they can also uncover fraudulent activity.
The sums of the entries in the subsidiary ledgers are recorded in “reconciliation accounts” in the general ledger. Entries in subsidiary ledgers, such as payables or receivables, should be compared with their supporting documents, and the sum of entries in each branch ledger should be compared with their corresponding entry in the general ledger. There are several possible mistakes that can be made when entering a ledger, and most of them do not involve fraud or embezzlement. For example, items may be posted with the correct cash amounts but to the wrong account, or data in a transaction may be transposed. A thorough reconciliation of the general ledger should uncover these errors. When errors or discrepancies are found, they should not be corrected, but recorded separately and recorded as reconciliation entries.
One of the most important general ledger reconciliations is cash reconciliation, which compares ledger entries to bank deposit records. While errors discovered at this stage may be simple clerical miscalculations, they should be taken very seriously; if not caught, they can lead to an error in the company’s financial position on the cash flow statement, which is taken entirely from the general ledger.
Another important element of general ledger reconciliation is the trial balance, which is simply comparing the sum of all debits to the sum of all credits. If the two totals are not equal, the accounts are unbalanced and, at the very least, the error must be traced and a correct entry made.
Especially in a large organization, it is imprudent to wait for the preparation of the financial statements to reconcile the general ledger. Instead, reconciliation of general ledger accounts should occur on an ongoing basis as postings are made, and the components that make up branch ledgers should be reviewed and reconciled as frequently as possible. A trial balance should also be taken as frequently as possible, but in no case less than once a month.
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