Tracking assets, liabilities, equity, expenses and revenue, the general ledger is the bedrock of business accounting. General ledger reconciliations are the processes through which accounting professionals ensure an organization’s general ledger is measurably accurate. The general ledger is the central record of every single one of a company’s financial transactions.
The raw financial data collected in the general ledger is the basis of financial reports such as balance sheets, cash flow statements and more. The general ledger is also used to meet regulatory accounting compliance standards and to monitor the organization’s overall financial performance. As such, maintaining an accurate general ledger is crucial for ensuring financial control, making informed business decisions and driving growth
Types of General Ledger Reconciliations
The point of reconciliation is to locate and correct any discrepancies or errors the general ledger might contain. The process compares the general ledger’s account balances against corresponding documentation, which includes bank statements, invoices, receipts and other financial records.
There are several types of reconciliation. Businesses can choose the approach most appropriate to their accounts or operational needs. Some of the most common types of reconciliation methods are:
- Bank reconciliations, which compare transactions recorded in the general ledger against bank statements to verify that all banking transactions are being accurately recorded. Credit card and loan statements also fall under this category, as do investment reports.
- Customer reconciliations, which compare transactions invoiced to customers with the accounts receivable balance in the general ledger. This method might involve checking directly with customers to verify balances paid and unpaid.
- Vendor reconciliations, which compare vendor statements or invoices against the general ledger’s accounts payable balance.
- Account variance reconciliations, which are for accounts that have no external reports or statements. Some expense accounts fall into this category. Instead, businesses examine how the starting and ending account balances vary, comparing monthly activity against that variance.
How Do General Ledger Reconciliations Work?
General ledger reconciliations are a multi-step process. The length and complexity depends on the size of the business and the accounts being verified. Along with documenting the entire procedure for future audits and internal quality assurance, the process generally follows the following steps:
- Step 1: Collect appropriate supporting documentation, including bank statements, expense receipts, invoices, etc.
- Step 2: Compare each account against its corresponding documentation to identify and verify transactions and balances.
- Step 3: Identify and investigate any disparities to discover when, where and how they originated.
- Step 4: Post updated entries to the general ledger when the discrepancies are resolved.
- Step 5: Have the updated ledger reviewed and approved.
Why Reconciliation Is Vital
The consequences of not reconciling the general ledger are diverse and far-reaching. Unverified financial data leads to inaccurate financial reports, which can be damaging in several ways. In the best case, the lack of authentic information can impede or delay crucial business decisions, which can cause missed revenue opportunities, losses or damage an organization’s reputation with stakeholders. In the worst case, it can lead to potential tax compliance or even legal issues.
An accurate general ledger improves compliance, supports smooth business function and promotes future success. Accurate and up-to-date general ledger data provides businesses with a clear picture of their financial health. That visibility enables data-driven decision making when it comes to pursuing new sales markets, negotiating with vendors or investing in new technology.
Signs Your General Ledger Needs a Clean Up
Every business should reconcile the general ledger on a regular basis. Signals that reconciliation might be overdue include:
- Cash flow management issues
- Discrepancies between balances
- Overdue or missing payments
- Sudden pressing tax issues
- Other unusual activity
A regular reconciliation schedule prevents small errors from compounding. Depending on the size and scale of the organization or the complexity of the account, businesses typically reconcile the general ledger on a monthly, quarterly or annual basis.
Best Practices for Maintaining an Accurate General Ledger
The more accurate the general ledger is, the simpler the reconciliation process will be. These practices can help you maintain your ledger.
- Keep your chart of accounts as up to date as possible.
- Have a system in place to save all documents needed for reconciliation, so they can be produced for comparison as needed.
- Implement a consistent reconciliation schedule, and ensure all pertinent parties are aware of the timing and responsibilities.
Consider using accounting automation software to streamline the reconciliation process. Modern technology tools can simplify reconciliation, pulling relevant statements and reports from across diverse sources. Whichever method you choose, establish internal controls and oversight and maintain accurate documentation of the entire process.
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An accurate and well-maintained general ledger is the foundation of business success. Regular reconciliation supports an organization’s financial well-being, ensures compliance and promotes future growth.
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