General ledger reconciliation is the process of auditing the company’s financial records to ensure they are accurate and complete. All financial transactions are tracked in the general ledger. The reconciliation compares the data to external records to ensure consistency and accuracy.
The discrepancies found could lead to audits and investigations to correct those errors, especially missing transactions and duplicate entries. This process maintains financial accuracy, detects fraud and ensures compliance with accounting standards.
Understanding What a General Ledger Is
Before defining the general ledger reconciliation, you must understand what a general ledger is. By definition, a general ledger is the primary accounting record that contains all financial transactions organised by pre-defined criteria. It summarises every financial activity within an enterprise by:
- Tracking all financial transactions
- Including the liabilities, revenues, expenses and equities
- Serving as the foundation for financial statements
- Helping track the enterprise's financial health
As a result, the general ledger provides a complete financial overview in a given period, resulting in consistent bookkeeping. It is also a foundation for tax preparation and auditing to finally support the financial close.
The Role of General Ledger Reconciliation in Financial Close
During financial close, an enterprise finalises its accounting records for a specific period (e.g., monthly, quarterly, or annually) to ensure accurate financial reporting. General ledger reconciliation verifies that all accounts in the ledger match supporting documents, such as bank statements, invoices, and sub-ledgers.
Without proper reconciliation, errors could lead to inaccurate financial statements. So, the general ledger reconciliation is a crucial step before officially closing the books for a given period.
Types of General Ledger Reconciliation for Finance Close
There are a few types of general ledger reconciliation. Most of them are relevant for the financial close process, so let's take a look:
- Bank Reconciliations: Ensuring the cash account ledger balances are in line with the bank statements
- Accounts Payable Reconciliation: Matching the trial balance from the AP ledger with the AP ageing report
- Account Receivable Reconciliation: Comparing the AR ledger balance with unpaid sales invoices
- Fixed Asset Reconciliation: Reconciling the GL trial balance with fixed asset sub-ledger totals
- Payroll Reconciliation: Ensuring payroll expenses and liabilities match the payroll reports
- Debt Reconciliation: The process of tying debt balances in the general ledger to creditors' account statements
- Equity Reconciliations: Verifying owners' equity accounts
The mentioned reconciliations are crucial to maintaining the accuracy of financial records during the closing process. The result is identifying mismatches on time and preparing accurate statements.
How Are General Ledgers Used in Financial Close?
General ledgers are the foundation of the financial close process. They contain all financial transactions for a company, organized by accounts such as assets, liabilities, revenue and expenses.
Using the general ledger in financial close ensures accurate reporting, compliance with regulations, fraud detection, and better decision-making. Here’s how it is being used in financial close:
1. Recording Transactions
Throughout the accounting period, all financial activities like sales, purchases, payroll and expenses-are recorded in the general ledger. They are later used to create accurate reports and get you closer to the financial close.
2. Reconciling Accounts
Before closing the books, accountants compare general ledger balances with external records like bank statements, invoices and sub-ledgers to identify and correct discrepancies.
3. Adjusting Entries
If errors, missing transactions or accruals are found, you should adjust the journal entries to ensure accuracy. This includes depreciation, revenue recognition, and expense adjustments.
4. Reviewing Financial Statements
Once you reconcile the general ledger and the needed adjustments are made, you can generate financial statements, including a balance sheet, income statement and cash flow statement.
5. Closing the Period
After verification, the books are officially closed for the period, preventing further changes. The next period begins with updated balances carried forward.
How to Perform a General Ledger Reconciliation?
There are a few key steps to follow to perform general ledger reconciliation properly, which often includes:
1. Identify the Accounts To Reconcile
The general ledger reconciliation requires identifying specific accounts that need reconciliation. Those are often the accounts with high transaction volumes or the ones crucial for financial statements.
2. Document Gathering
The reconciliation process continues with collecting relevant financial documents like bank statements, receipts, invoices and accounting records. These documents must match the reconciling period, too.
3. Compare Balances
The next step is to compare the general ledger account balances with the reported balances. This ensures accuracy, ensuring you avoid or overcome the discrepancies or investigate their causes.
4. Making Adjustments and Approvals
Once you compare and adjust the journal entries to correct the errors, you're ready to reconcile the general ledger. Authorised personnel should take a look, like a finance manager or controller.
5. Document the Process
Maintain all documentation related to the reconciliation process. This includes original transaction records, notes on discrepancies, and copies of adjusting journal entries to recall later if needed.
Common Mistakes During a General Ledger Reconciliation
Mistakes may happen during the general ledger reconciliations through various phases. Let's see what are the most common ones:
- Data Entry Errors: Mistakes made when entering financial information into the general ledger
- Timing Differences: These errors cause discrepancies that complicate the reconciliation
- Duplicate Entries: A mistake that may inflate the account balances
- Missing Transactions: Overlooked deposits, payments or invoices during the process
- Unmatched Transactions: Transactions that appear in one record but not in the corresponding one
- Reconciliation Process Errors: Mistakes made during the reconciliation itself, such as overlooking transactions or miscalculating adjustments
To avoid these errors, you must standardize the documentation or even leverage a software solution to speed up the general ledger process. It also results in more efficient financial close with fewer manual errors and improved compliance.
Conclusion on the Critical Role of GL Reconciliation
General ledger reconciliation controls financial accuracy, prevents fraud and supports strategic decision-making. It is a systematic process of verifying financial records upon financial close. The goal is to provide an accurate report on the enterprise's financial health.
By treating reconciliation as a critical business process, enterprises can transform a routine accounting task into a strategic financial management tool.