Welcome to this post about general ledger reconciliation best practices. For hardware-centric and procurement-heavy companies, financial statement fraud can be a significant threat, with organizations losing 5% of their revenue yearly to accounting fraud, according to the Association of Certified Fraud Examiners. This type of fraud is also the most costly, with businesses losing an average of $1 million. But how can companies minimize accounting and financial fraud? The answer is through regular account reconciliation.
In this post, we will discuss the importance of general ledger reconciliation and its best practices. General ledger reconciliation is crucial for accounting and finance teams, not only to prevent fraudulent activities but also to ensure that source documents and account balances are in agreement to meet external reporting requirements. Moreover, having accurate financial statements provides business owners with the information they need to evaluate business performance and make informed decisions.
The general ledger is the master set of accounts that record all the transactions a business undertakes. General ledger reconciliation is the process of reviewing individual accounts within the general ledger to ensure that source documents match the balances shown in each account. This process involves comparing general ledger account balances with third-party data, independent systems, and source documents to ensure their accuracy. It also includes thoroughly investigating any identified discrepancies and taking prompt actions to resolve them.
In this post, we will discuss nine general ledger reconciliation best practices. These include improving reconciliations with financial automation, prioritizing balance sheets, ensuring account reconciliations are complete and accurate, constantly reviewing and improving the account reconciliation process, completing and evaluating account reconciliations in a timely manner, ensuring account reconciliations are in line with relevant accounting principles, evaluating key performance indicators, standardizing the reconciliation process, and regularly updating your reconciliation policy.
By following these best practices, companies can not only detect mistakes and reduce fraud but also grow their business. Reconciliation used to be a manual process, but 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.
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.
Learnings
For hardware-centric and procurement-heavy startups, accounting fraud can pose a significant threat, leading to a loss of revenue and even legal repercussions. In this post, we explore the importance of general ledger reconciliation, an essential process to ensure financial accuracy and integrity, and its best practices.
General ledger reconciliation involves reviewing individual accounts within the general ledger to ensure that source documents match the balances shown in each account. This process is crucial for accounting and finance teams to prevent fraudulent activities and meet external reporting requirements. Additionally, accurate financial statements provide business owners with the information they need to evaluate business performance and make informed decisions.
We discuss nine general ledger reconciliation best practices to help companies minimize accounting and financial fraud, such as improving reconciliations with financial automation, prioritizing balance sheets, ensuring account reconciliations are complete and accurate, and constantly reviewing and improving the account reconciliation process. Completing and evaluating account reconciliations in a timely manner and ensuring they are in line with relevant accounting principles are also essential practices to adopt.
Tracking key performance indicators and standardizing the reconciliation process can also help identify gaps and automation opportunities. Companies should update their reconciliation policies regularly to reflect the organization's position and values and evaluate reconciliation procedures to ensure they answer essential questions such as What? How? When? Why? And how much?
By following these best practices, companies can not only detect mistakes and reduce fraud but also grow their business. Traditional account reconciliation used to be done manually, but automation has made it easier for financial teams to highlight discrepancies and automatically reconcile accounts. Automation makes general ledger reconciliation faster, timely, and error-free.
In conclusion, performing general ledger reconciliation regularly and implementing best practices is essential for hardware-centric and procurement-heavy companies to minimize accounting fraud and ensure financial accuracy and integrity. By adopting these practices, companies can improve their overall financial health and make informed decisions to drive their business growth.
Frequently Asked Questions
1. What exactly is general ledger reconciliation?
Think of the general ledger as your financial brain—it tracks all the money coming in and going out of your company. Reconciliation is like your trusty sidekick, double-checking that everything adds up and there are no discrepancies. It's like verifying your credit card statement after a shopping spree!
2. Why is general ledger reconciliation so important?
Oh, it's essential! Besides thwarting those sneaky accounting fraudsters, it ensures your financial statements are as reliable as your grandma's cookie recipe. When making big business decisions, you want your numbers rock-solid!
3. Can general ledger reconciliation really save me time?
You bet! Embrace the power of automation, and those endless spreadsheets will be a thing of the past. Automation spots discrepancies faster than a cheetah chasing prey, and you'll have more time for those much-needed coffee breaks!
4. How do I prioritize my account reconciliations?
Treat your balance sheets like your favorite TV show! Categorize accounts into high, medium, and low risk. Focus on the high-risk ones like a detective on a thrilling case!
5. Any tips for ensuring accuracy during reconciliation?
Accuracy is the name of the game! Watch out for unusual balances, and make sure your reconciliations support the balance—no copy-paste shortcuts allowed!
6. As my business grows, how do I keep up with the increasing transactions?
Constantly review and improve your process! Just like a gymnast staying in top shape, keep that reconciliation process tip-top as your business expands!
7. How important is timeliness in account reconciliations?
Being punctual is key! Timely account reconciliations are like meeting deadlines, but with a lot less stress. Set due dates, track progress, and give high-risk accounts some extra TLC.
8. Can I customize my account reconciliations to my local laws and accounting principles?
Absolutely! Follow the rules and keep your reconciliations in line with accounting principles and local laws. We want everything to be above board—no shady business!
9. What are key performance indicators, and why should I monitor them?
Key performance indicators (KPIs) are like your financial health trackers. Monitoring them gives you valuable insights into your company's overall financial well-being.
10. How do I ensure consistency in my account reconciliations?
Standardize, standardize, standardize! Consistency is the secret sauce to success. When your reconciliations follow the same recipe each time, it's easier to spot any sneaky errors.
11. Can general ledger reconciliation really be my company's sidekick?
Absolutely! Embrace automation, prioritize your balance sheets, and be accurate like a pro sharpshooter. General ledger reconciliation can be your company's trusted sidekick in the fight against financial fraud!
