General Ledger Reconciliation: Policy, Process & Examples

Instructor: Mark Koscinski

Mark has a doctorate from Drew University and teaches accounting classes. He is a writer, editor and has experience in public and private accounting.

In this lesson, you will learn about the general ledger reconciliation and its importance. You will also learn about common subsidiary ledgers and other documentation used in this process.

The General Ledger

In accounting, an account records every transactional increase and decrease to the balance of that account. For example, the accounts payable account contains all transactions increasing or decreasing accounts payable. The general ledger is the record of all accounts used by the company. It is the main accounting record of the company, containing and recording every accounting transaction. The general ledger is also commonly referred to as the ledger, or the more informally, the 'books' of the company.

Internal Control

General ledger reconciliation an internal control procedure that helps ensure account balances in the general ledger are materially correct. This process must be carried out in a timely and consistent manner at the same time each month for optimal efficiency. As part of the internal control system of a company, there should be a written general ledger reconciliation policy to ensure this process is performed monthly for all balance sheet accounts of the company.

Subsidiary Ledgers

A common form of general ledger reconciliation occurs when a subsidiary ledger is reconciled to the general ledger balance. A subsidiary ledger contains detailed information on a specific account. Two of the most common subsidiary ledgers are the accounts receivable and the accounts payable ledgers. The accounts receivable ledger stores accounting data for each individual customer. The accounts payable ledger contains data for each vendor.

Different companies use several types of ledgers. One example is a company in a capital-intensive industry will use an equipment subsidiary ledger to record the extensive list of equipment it owns. The general ledger reconciliation process partially requires the balance of the subsidiary account agree with the corresponding balance in the general ledger. Any discrepancy needs to be investigated.

Accounts Without Subsidiary Ledgers

Sometimes general ledger accounts will not have a subsidiary ledger to reconcile to. The cash account is the prime example of this. In this case, the cash balance in the general ledger will be reconciled to the monthly bank statement. This process is becoming increasingly automated, so bank reconciliations will not be discussed here. Occasionally general ledger account balances must be reconciled to an outside statement. For instance, a general ledger rent deposit account must be reconciled to the bank statement to account for any interest the deposit has been accruing.

General Ledger Reconciliation Process

The following guidelines are a common example of how a general ledger reconciliation is performed.

  • Understand any accounting policies for the account you are about to analyze. Knowing what transactions belong in the account will be extremely helpful as you proceed. For example, if you are reconciling the accumulated depreciation accounts you will need to understand the depreciation policies of the company.
  • Gather supporting documentation for the account. If you are reconciling the bank account to the general ledger, you will need such things as the bank statement, cancelled checks and other supporting documentation. If you are reconciling accounts receivable, you will need the accounts receivable ledger.
  • Review the account. Are the transactions in the account properly recorded according to generally accepted accounting principles and the company policy? Are there any unusual transactions that you see, either because of the amount of the transaction or the nature of the transaction? For instance, a large cash withdrawal recorded in the petty cash account should be investigated immediately.
  • Make sure the general ledger balance agrees with the supporting documentation. Investigate any discrepancies and process any journal entries needed to ensure the two are in balance.
  • Document your work and obtain the necessary approval. The documentation not only demonstrates compliance with internal control policy and procedure but provides a road map for work in subsequent months.

Examples

You are required to perform a reconciliation of the accounts receivable subsidiary ledger to the general ledger at month end. After obtaining the required documents and reviewing them you do not notice any unusual items. Then you reconcile the subsidiary ledger total to the general ledger balance:

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