General Ledger Reconciliation Best Practices

Did you know that organizations lose 5% of their revenue to accounting fraud yearly?

According to the Association of Certified Fraud Examiners (ACFE), financial statement fraud is the most costly form of corporate fraud, costing businesses an average loss of $1 million. How can organizations minimize accounting and financial fraud? 

You guessed right, regular account reconciliation!

By performing regular general ledger reconciliations, businesses can detect fraud and prevent most of the critical material errors that occur on financial statements. 

The account reconciliation process is vital for accounting and finance teams not only to prevent fraudulent activities but also to ensure source documents and account balances are in agreement to meet external reporting requirements. 

Most importantly, having accurate financial statements give business owners the accurate information they need to evaluate business performance and make informed decisions. In this guide, we'll discuss the general ledger reconciliation best practices. 

What Is General Ledger Reconciliation?

The general ledger (commonly referred to as the GL) is the master set of accounts that record all the transactions a business undertakes. 

When a person reconciles the general ledger, they review the individual accounts within the GL to ensure the source documents match the balances shown in each account. 

Hence, general ledger reconciliation is the activity performed by an accountant (or any other person handling accounts) to verify the integrity of account balances. The reconciliation process involves comparing the GL account balances with third-party data, independent systems, and source documents to ensure the balances are accurate. 

It also includes thoroughly investigating any identified discrepancies and taking prompt actions to resolve them. 

General ledger reconciliation is an integral part of the financial close process and is used to verify the accuracy of financial statements before they are released to the public. In most cases, this critical role is performed by accountants and bookkeepers. 

Luckily, with account reconciliation software, general ledger reconciliation has become easier, more accessible, transparent, and more accurate. 

General Ledger Reconciliation Best Practices

Without further ado, let's get to the best practices for general ledger reconciliation that you should observe. 

1. Improve Reconciliations with Financial Automation

A recent study by Ventana Research found that many organizations are increasingly automating the accounting docket. 

Still, many companies rely on legacy systems that require manual processes, such as spreadsheets. While spreadsheets can be used to reconcile ledger accounts and even prepare invoices, they are prone to errors. 

The account reconciliation process is complex and hectic and can subject your company to account oversights and duplication risks if not automated. Account reconciliation software makes general ledger reconciliation easy, timely, and error-free. 

Automation improves the reconciliation process by:

  • Highlighting discrepancies
  • Streamlining data integration
  • Automatically reconciling low-risk accounts

Additionally, automating the reconciliation process improves transparency as everyone can see the progress that is jointly made towards the month-end close. The key features to look for in an account automation software include real-time dashboards, automated balance interfaces, and automated user notifications. 

2. Prioritize Your Balance Sheets

One of the general ledger reconciliation best practices is prioritizing accounts that inherently have the greatest risk of error. 

In this case, you'll want to prioritize your balance sheet. 

A practical approach to this is "risk ranking" balance sheet accounts into three categories: high risk, medium risk, and low risk. 

Risk ranking requires a comprehensive analysis of both qualitative and quantitative factors of individual accounts/entries. This approach should help you determine the frequency of reconciliations. The high-risk accounts should be reconciled regularly.

3. Ensure Account Reconciliations are Complete

Completeness is one of the fundamental principles of good account reconciliation practices. This principle aims to make sure that all accounts are reconciled. 

Have a company-wide policy that will see all accounts are reconciled on time to ensure consistency. Also, ensure all reconciliations are well documented, including the time when those reconciliations were carried out. 

Here are some tips to help ensure completeness when performing reconciliations.

  • Reconcile all accounts, including new accounts
  • Ensure your reconciliation policy is updated regularly to accommodate changes in your organization and the governing laws. 
  • For each reconciliation, ensure there is a clear title, a brief account description, and procedures on how to complete the reconciliation

Remember, each reconciliation should paint a vivid picture of what's in the account during the time of reconciliation. 

4. Ensure Account Reconciliations are Accurate

Reconciliation is a measure of internal control. It helps to ensure that transactions and financial activities are taking place as documented. 

When running your business, you'll incur a lot of costs, and you may want to ensure they are recorded accurately. And you can only ascertain this by reconciling the accounts. Here are some tips to help ensure your general ledger reconciliations are accurate.

  • Pay attention to accounts with unusual balances (such as a receivable account with a credit balance or an accrual with a debit balance)
  • Ensure the reconciliation supports the balance and not just a repeat of what's in the general ledger
  • Ensure you're reconciling the correct, most updated balances

Additionally, ensure the person conducting the reconciliation is adept with the account preparation and financial reporting best practices. 

5. Constantly Review and Improve Your Account Reconciliation Process

Ledger reconciliation is a critical yet repetitive process for any organization. 

As the number of transactions increases, account reconciliations become more complex. The likelihood of bottlenecks and workload imbalances also increases, meaning business owners must continuously review their processes and make necessary improvements. 

That said, it's crucial to constantly evaluate your reconciliation processes and implement changes where necessary to increase accuracy and efficiency. Here are some tips to help you improve your account reconciliation process.

  • Review your general ledger reconciliation policy to ensure it accurately reflects the organization's position and values
  • Evaluate the reconciliation procedures to ensure they answer the: What? How? When? Why? And how much?
  • Regularly review the entire account reconciliation process to identify improvements that may help drive accuracy and timeliness

6. Complete and Evaluate Account Reconciliations in a Timely Manner

Having your account reconciliations completed on time is essential for reporting purposes. You'll also want to review your reconciliations on time to ensure the process is efficient and that it was completed properly. 

Here are some tips to ensure account reconciliations are completed in a timely manner.

  • Set due dates for the reconciliations
  • Have a system in place to track the status and progress of each reconciliation
  • Give high-risk accounts priority to identify any problems
  • Review the discrepancies and post the necessary adjustments early before the accounting period is closed

The timely reconciliation of the general ledger is a critical control activity to ensure everything is working as intended. 

7. Ensure Account reconciliations are in Line with the Relevant Accounting Principles

General ledger reconciliations should support the accounting principles associated with the account, such as historical costs and full disclosure. They should also follow the local statutory requirements. Reconciliations should also be objective and in line with company policies specific to the general ledger. 

8. Evaluate Key Performance Indicators

Numbers are critical to any organization, whether they're in the form of cost, net income, cash flow, revenue, profit, or losses. 

Just as these financial figures are key to determining the current state of a business, key performance indicators are vital to assessing the performance of the financial close.

Examples of KPIs to track include:

  • On-time reconciliations
  • Close quality
  • On-time critical path
  • Process costs

It's important to track these KPIs when performing reconciliations. Focusing on KPIs enables decision-makers to get an overview of how reconciliations are conducted from start to finish and identify potential gaps in the process. 

9. Standardize the Reconciliation Process

Bookkeepers follow a series of steps each time reconciliations are performed to ensure everything is accurately recorded, documented, and reported. 

This process relies on standard procedures to ensure reconciliations are done accurately each and every time. And when reconciliations are uniform, it can be easier to spot errors and identify unusual items or figures. 

That said, standardizing the account reconciliation process is instrumental in reporting errors, mitigating risks, and training new employees. Organizations should continually assess their reconciliation processes to identify gaps and automation opportunities. 

Wrapping Up

Organizations, especially growing startups, should regularly perform general ledger reconciliations to ensure the accuracy and integrity of the accounts. 

Traditionally, account reconciliations used to be done manually. Today, automation has made it easier for financial teams to highlight discrepancies and automatically reconcile the accounts. Automation makes general ledger reconciliation faster, timely, and error-free. 

By following the general ledger reconciliation best practices discussed above, you'll not only be able to detect mistakes and reduce fraud but also grow your business.