Simple Guide to General Ledger Reconciliation

By this time, you already know how important accurate accounting is. It helps you budget, plan, and manage every expense. Simply put, it allows you to stay in complete control of your business’s finances. 

The problem is that, no matter how much care you take in recording your business’s income and expenses, even when you use accounting software, mistakes still happen, and errors slip through the cracks. One of the best ways to eliminate these errors and mistakes is by preparing a general ledger reconciliation. 

But now the questions are: What are the benefits of general ledger reconciliation, and what are the steps to prepare one. Fortunately, we’re here to help, and in this post, we’ll look at these aspects in more detail. 

What is General Ledger Reconciliation?

To start, let’s recap what general ledger reconciliation is. At their core, general ledger reconciliation allows you to ensure that the balances recorded in your general ledger account, and by implication, your accounting is correct. 

This is because your general ledger contains the record of every transaction you perform during a financial year. And during account reconciliation, you’ll compare these transactions in the general ledger against the source of those transactions. In this way, you’re then able to detect any errors or anomalies. Once identified, you’ll also create adjusting entries during the account reconciliation process.  

Benefits of General Ledger Reconciliation

We’ve now recapped what general ledger reconciliation is. Let’s now look at some of the benefits of general ledger reconciliation:

  • Data validation. Because you’ll compare every transaction in your general ledger against the source of the transaction, you’ll validate the data in your general ledger account. During this process, you’ll then be able to identify any errors, mistakes, or irregularities in your books. Also, if you identify any irregularities, you’ll be able to investigate these discrepancies. 
  • Adjustments. Another benefit of general ledger reconciliation is that, once you’ve identified and investigated any discrepancies in your ledger, you’ll be able to record adjustments to correct these errors in your general ledger. 
  • Accuracy. Combined, the ability to identify and investigate any errors and irregularities and take steps to rectify them, ensure that your accounting is accurate. In addition, general ledger reconciliation ensures that every transaction is backed by supporting documentation. This not only, as mentioned, ensures accuracy, but also accurate tax and financial reporting, so you’ll have peace of mind when tax season comes. 
  • Error prevention. Obviously, when you work through every transaction, make sure it has supporting documentation, and identify any mistakes, you’ll prevent errors in your books. However, during this process, you’ll also learn where mistakes are more likely to happen and, in turn, take steps to eliminate them which makes your bookkeeping more efficient. 

How Do You Prepare a General Ledger Reconciliation?

Now that we’ve recapped what general ledger reconciliation is and why it’s important, it’s time we look at the general ledger reconciliation process. It’s vital to remember that, due to the essential role general ledger reconciliation plays, all these steps be performed accurately.  

Getting the Necessary Details of the General Ledger

To start off, the first step in the general ledger reconciliation process is getting the information about the general ledger account you want to reconcile. This typically involves getting the ending balance of the general ledger or, in other words, the balance of the general ledger account at the end of your accounting period. 

During this first step, you’ll also compare the balances in other accounts to the balances in your general ledger account. Here, it’s crucial that you work as precisely as possible, so that you don’t have to come back later to find simple mistakes. Fortunately, when using accounting software, this could be a bit easier.  

Reconcile Your Accounts to the General Ledger

Once you’ve gathered all the information mentioned above, you can start with the account reconciliation process. Here, you’ll work through all of the transactions listed in your general ledger account for every account you have. When you do this, you’ll make sure that every detail of the transaction including its date, amount, and account is correct. 

You’ll also need to ensure that there’s supporting documentation or information for every transaction, whether it’s your bank statements or information from external systems or third-party platforms. Ultimately, during this step of the process, you’ll validate the correctness of your general ledger and, ultimately, your financial statements. 

Investigate any Discrepancies

If you find any transactions that you can’t substantiate, or you notice any discrepancies between the general ledger and the supporting documentation and information, you’ll need to research and investigate these transactions. These discrepancies can occur for a variety of reasons. 

For instance, these discrepancies might arise because of mistakes, missing transactions, clerical errors, timing differences, and several other reasons. Keep in mind, though, that not all discrepancies in your general ledger would indicate an error, so it’s vital that you investigate every one. 

By investigating these discrepancies, you’ll learn what they are, how they happened, and what action you can take to remedy them. 

Make Adjustments

Once you’ve identified and investigated any discrepancies in your general ledger account, you’ll be able to make adjustments to correct the error. It’s important to remember that you shouldn't edit any of the entries in your books to correct the error. 

So, to do this, you’ll make correcting entries in your books. You can do this in one of two ways. You can either reverse the original transaction and create a new entry, or you can create a single new entry that achieves the same result. Keep in mind, however, that you're less likely to make mistakes if you reverse the incorrect transaction first and then create a new entry.  

To reverse an incorrect entry, you’ll swap the accounts you initially debited and credited. For example, if you initially credited accounts receivable and debited your cash account, you’ll now debit accounts receivable and credit your cash account with the same amount. Once done, you can create a new entry like you would have when you initially recorded the transaction. 

If you’ve identified a missing transaction in your books, you’ll just create a journal entry like you would’ve if you hadn’t missed it.  

Prepare Any Adjusting Entries

Once you’ve made correcting entries as mentioned, you’re almost done. The last thing left to do is to prepare adjusting entries. This is because it’s customary to record these adjusting entries and depreciation in your books at the end of your accounting period, only when you’ve verified the accuracy of your books. 

As such, once you’ve followed the process above, you’ll, for example, record any recurring journal entries for depreciation of equipment. It’s important to remember, however, that any adjustments made for accrued expenses and deferred revenue should be reversed eventually to not misstate your financial position. 

Run Reports

Once you’re done with the process above, and you’ve made adjustments to your ledger, your books will be accurate, and every transaction will be supported by supporting documentation. In addition, by completing the general ledger reconciliation process, you’ll have all the information needed for audit purposes.  

This means you’ll finally be able to generate a ledger reconciliation report and basic financial statements for your business. 

The Bottom Line

During the course of business, you’ll have a lot of expenses, from procuring hardware to paying bills. In addition, you’ll also generate income to be able to pay these expenses and keep your business running smoothly. To ensure precise accounting, you’ll need to ensure that you record each of these transactions accurately.

When you do, you’ll be able to plan and budget better and manage your expenses better. The thing is, no matter how accurately you try to work, mistakes happen. And these mistakes lead to inaccuracies in your books. Account reconciliation is one of the best ways to eliminate these inaccuracies. Hopefully, this post helped illustrate why they are so important and the steps you’ll need to follow to prepare a general ledger reconciliation. 

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