General Ledger Account Reconciliation Example

Not everyone in the business world loves accounting - while essential, many see it as a cumbersome process that takes up time and resources they could be spending on other things.  However, it is an integral thing to understand and keep tabs on,  especially for small businesses and startups. In this article, we'll review general ledger accounts, their functions and how you can stay on top of their accuracy through reconciliation.

What Is A General Ledger?

In finance, a general ledger is an account used to record and aggregate all of a company's transactions. Businesses use general ledgers as a means to maintain a comprehensive and accurate copy of their financial records, making the tasks of bookkeeping, tax filing and expense reviews simple.

How Does A General Ledger Account Work?

General ledgers are a pivotal part of the double-entry accounting system. This framework is based on the idea that each financial transaction has two entries: a debit and a credit.  The sum of all debits must equal the sum of all credits in order for the books to balance.

The general ledger is where businesses track all these transactions and ensure that they are balanced. At the end of each accounting period, businesses generate financial statements from their ledger data. These statements show how much money the company made or lost, as well as its total assets and liabilities. This information is critical for making sound financial decisions, such as whether to invest in new equipment or hire additional personnel.

Types Of General Ledger Accounts

There are five types of general ledger accounts that exist, each pertaining to its own specific function and purpose. The following is a list of these five types.

Asset Accounts

These accounts store information pertaining to a company's money, property and other valuable possessions. Common examples of asset accounts include cash, Accounts Receivable, inventory and office equipment.

Liability accounts

These accounts keep track of the debts and financial obligations owed by a business. Accounts payable, credit cards and loans all fall under this category.

Equity accounts

Also known as shareholder's equity, these accounts store information pertaining to a company's net worth. This includes items such as investments, common stock and retained earnings.

Revenue accounts

Income generated by a business is recorded in these types of accounts. Sales, service fees and interest income all fall under this category and are commonly recorded in an income statement.

Expense accounts

These accounts keep track of the money spent by a business on operating costs. Common examples of expenses include rent, utilities, payroll and advertising.

As you can see, general ledger accounts play a vital role in tracking and recording a company's financial transactions. Without them, it would be nearly impossible to produce accurate financial statements or make sound decisions about how to best grow and manage a business. But how do you ensure that they're always accurate and up-to-date?

The answer is simple: general ledger account reconciliation.

What Is General Ledger Reconciliation?

Reconciliation is a term used in accounting to describe the process in which two records are compared for consistency with one another. For general ledgers, this means comparing a journal entry to supporting documentation, like bank transactions or credit card statements, to ensure that all transactions have been properly recorded.

The process of reconciling a general ledger involves matching the ledger entries with the supporting documentation, correcting any errors, and then making any necessary adjustments. This ensures that the ledger is an accurate representation of a company's financial activity.

Reconciliation is important because it helps to ensure the accuracy of a company's financial records, and all-in-all promotes a much more seamless and transparent accounting process.

The Benefits

Besides the simple fact that general ledger reconciliation makes managing finances easier for companies, there are a number of specific reasons why organizations see such a value in undertaking it.

Adjustments

No one is perfect, and the reality is that most businesses will have an error or discrepancy in their general ledger at some point. While often an innocent mistake, inconsistencies like these can cause big problems down the line if they're not fixed. Reconciliation provides a way to catch and correct these errors, ensuring that a company's financial records are as accurate as possible.

Prevention of Fraud

One of the most important benefits of reconciliation is that it helps to prevent fraud. By constantly comparing the general ledger to its supporting journal entry, businesses can catch any unusual or suspicious activity that may be taking place. This helps to protect the company from financial loss and damage to its reputation.

Peace of Mind

Undertaking account reconciliation on a regular basis gives business owners and managers peace of mind, knowing that their balance sheet account is in order and that they have a clear understanding of their current financial situation. This allows them to make more informed decisions about how to best grow and manage their business.

Improved Cash Flow

Another benefit of reconciling accounts is that it can help to improve a company's cash flow. When all transactions are properly recorded and accounted for, businesses have a better understanding of their incoming and outgoing cash, which can help them to make more strategic decisions about how to best use their money.

General Ledger Account Reconciliation Examples

While general ledger account reconciliation can be a comprehensive process that encompasses a business' holistic transaction records, there are also a number of specific forms it can take. Some of the most common include:

Bank Reconciliation

One of the most important types of reconciliation is bank reconciliation, which is the process of matching a company's bank transactions and balance sheet account with its internal records. This helps to ensure that all transactions have been properly recorded and that there are no errors in the account.

Credit Card Reconciliation

Another important type of account reconciliation is credit card reconciliation. This is the process of matching a company's credit card statements with its internal records to ensure that all transactions have been properly recorded and that there are no errors in the account.

Vendor Reconciliation

Vendor reconciliation is the process of matching a company's vendor invoices with its internal records to ensure that all transactions have been properly recorded and that there are no errors in the account.

Customer Reconciliation

Customer reconciliation involves matching the customer invoices in the general ledger with the supporting documentation, like sales receipts or bank statements. This helps to ensure that all customer payments have been properly recorded, and that any outstanding payments are accounted for.

Preparing A General Ledger Reconciliation

Although ledger account reconciliation can seem daunting at face value, it's quite straightforward when you know what steps to take. Here is a review of what the process will generally comprise of.

Obtain The Necessary Details

The first step in reconciling a general ledger is making sure that you have the details and documentation necessary to start the process. This means obtaining the relevant information on the account in question - most namely its ending balance and activity.

Compare Ending Account Balances To Supporting Documents

The next step is to compare the ending account balance in the general ledger to the corresponding balance on the supporting documentation. This will help you to identify any discrepancies between the two records.

Investigate Discrepancies And Make Adjustments

Once you've identified any discrepancies, it's time to investigate them further to try and understand why they exist. This may involve reaching out to the relevant parties, like vendors or customers, to obtain more information. Once you have a clear understanding of the discrepancy, you can make the necessary adjustments to the account.

Document The Reconciliation Process

Last but not least, it's important to document the account reconciliation process as you go along. This will help to ensure that the process is conducted properly and that all discrepancies are accounted for. It will also be useful if you need to go back and reference the reconciliation at a later date. Accounting software can be helpful in this regard, as it will generally provide a template for documenting reconciliations.

General ledger account reconciliation is an important part of maintaining accurate financial records. By ensuring that your company is regularly reconciling its accounts, you can help to prevent errors and ensure that your business is  on solid financial footing.