What is General Ledger (GL) Reconciliation: Process, Steps, Examples & Best Practices

General ledger reconciliation is an important accounting process. It compares a company's general ledger with its sub-ledgers. Reconciling GL with sub-ledgers ensures that all financial records are valid and consistent. It gives management a clear picture of the company's true financial position, identifying errors and preventing fraud.

Key Takeaways

• General ledger reconciliation compares a company's general ledger with its sub-ledgers. These include accounts payable, accounts receivable, inventory, cash, sales, purchase, and fixed assets. 
• GL reconciliation includes five types. bank account reconciliation, vendor reconciliation, department-specific ledger reconciliation, inter-company reconciliation, and customer reconciliation.
• The five key steps are collecting supporting documents, identifying items to reconcile, comparing accounts, resolving mismatches, and finalising/approving the general ledger.
• Regular GL reconciliation helps businesses detect accounting errors and prevent financial fraud. It also helps meet legal and tax compliance requirements.
• Common challenges include manual data entry errors, missing supporting documents, and a lack of standard procedures. Automation will help to significantly reduce these issues.

What is general ledger reconciliation?

General ledger account reconciliation is the process to compare the general ledger with sub-ledgers and ensure consistent accuracy in records of transactions across the ledgers. The aim of general ledger reconciliation is to identify and resolve discrepancies in accounting across ledgers.

A general ledger is the book that records all the financial transactions conducted during business operations within a specific time period. Today, we use digital general ledgers, either as a standalone spreadsheet, or as part of an enterprise accounting application.

Example of general ledger maintained in a spreadsheet is shown below-

A general ledger reflects changes - 

• Revenue 
• Expense 
• Assets 
• Liabilities 
• Equity 

So, a general ledger is a combination of sub-ledgers, like: 

• Inventory ledger 
• Sales ledger 
• Purchase ledger 
• Cash ledger 
• Fixed asset ledger 
• Account payable ledger 
• Account receivable ledger 

Importance of general ledger reconciliation

The purpose and objectives of general ledger reconciliation are to maintain flawless accounts in businesses. Importance includes the following- 

• Accuracy of records: GL reconciliation helps a company manage its finances with the highest level of accuracy and integrity, ensuring compliance with legal and tax regulations. Besides, financial integrity helps companies attract lenders, investors and other business partners.
• Consistency in reporting: Reconciling the general ledger is the only way to find gaps, errors and discrepancies in transactions across the departments in a business. It makes internal and statutory auditing less time-consuming and more effective.  
• Business health: An accurately and consistently reconciled general ledger shows the true financial health of a business from a bird's-eye view. It provides management more control over the business process and helps them make fact-based strategic decisions. 
• Fraud detection: General ledger account reconciliation helps regulators, auditors and management identify financial fraud and accounting malpractices. 

Types of general ledger reconciliation

General ledger reconciliation can be of five types: 

• Bank account reconciliation - It involves comparing bank-issued periodic account statements with bank transactions recorded in the company’s ledger. Most companies accept digital payment tools today for conducting financial transactions. So, bank reconciliation helps spot a significant portion of potential errors and discrepancies. 
• Vendor reconciliation - This can also be termed as the accounts payable reconciliation. It requires reconciling bills and invoices raised by suppliers and vendors with payments made to them. This process helps avoid overpayment and resolves conflicts with vendors. 
• Department-specific ledger reconciliation - This type of reconciliation involves comparing department-specific sub-ledgers with the general ledger within the company, like inventory, sales, petty expenses, salary, etc. 
• Inter-company reconciliation - Large parent companies may have regular transactions with their multiple subsidiaries. Inter-company reconciliation helps subsidiaries and the parent to avoid under-reporting or over-reporting of inter-company sales, expenses, assets, and liabilities. This is critical for understanding the financial health of the organisation within a complex holding structure. 
• Customer reconciliation - This is critical for businesses selling goods and services on credit. It involves comparing invoices raised to customers with payments received from customers. It helps avoid overdue and short payments. 

How to do general ledger reconciliation?

General ledger reconciliation process 

General ledger reconciliation is an accounting and auditing process that compares the general ledger account of a company with other sub-ledger accounts. It involves checking individual entries, keeping track of changes within a period, and identifying errors and discrepancies. Once identified, the reconciliation process also rectifies errors, resolves the discrepancies, and makes necessary adjustments in the final account.

Let us understand the process of reconciling the general ledger, step by step. 

• Step 1: Collect documents - General ledger account reconciliation is about comparing every relevant record of financial transactions conducted within a period. So, the first step of reconciliation is to gather all the documents to support each transaction.
• Step 2: Identify each and every item to be reconciled - A general ledger is the account of multiple sub-ledger accounts. So, the next task is to check all the sub-accounts and individual entries in those accounts that are to be reconciled. 
• Step 3: Compare accounts and entries - It is the step in which accounts and entries are compared. This will help identify discrepancies in entries across different ledgers. 
• Step 4: Resolve discrepancies - Once discrepancies have been identified, accountants or auditors need to find the reasons behind those gaps and take corrective actions to resolve them. At this stage, it is also important to document those discrepancies and how they are being resolved. It improves accounting and auditing practices within the company. 
• Step 5: Finalise the general ledger - Finally, all the discrepancies have been resolved, adjustments made and entries in sub-ledgers accurately match with general ledger entries. It is time to release the reconciled and updated general ledger. 

In large companies, the accounts department is required to obtain official approval from the management and other stakeholders before finalising the general ledger.  

General ledger account reconciliation examples

In the following image, we can see an example of receivable ledger reconciliation. As per the records, there is a discrepancy of over an amount of 40,000 (shown in RED) between ‘invoice raised’ and the actual entries in the accounts. This shows a significant gap that can distort the company's finances if not taken care of during the reconciliation process.    

Best practices for general ledger reconciliation

General ledger reconciliation is extremely essential in business accounting. So, it is essential to follow only the best accounting practices in this process. 

Some of the general ledger reconciliation best practices are: 

• Leverage accounting automation to reduce or entirely stop manual data entry. 
• Segregate responsibilities across teams and ensure accountability. 
• Document the process of general ledger reconciliation for further review and assessment. 
• Train stakeholders on the importance and best practices of general ledger account reconciliation. 
• Promote company-wide behaviour and practice of compliance.  

Benefits of general ledger reconciliation

The benefits of reconciling the general ledger accurately and consistently are: 

• Accurate understanding of a company’s financial health. 
• Better strategic decision-making capabilities for the management. 
• Ability to counter risks related to financial theft and frauds. 
• Manage business operations with maximum efficacy and efficiency. 

Challenges in general ledger reconciliation

The process of reconciling the general ledger in any business is open to various challenges.  

• The major challenge is the inaccuracy in manual data entry. 
• Lack of supporting documents also causes significant problems. 
• Absence of standard procedures in reconciliation and irregular practice of reconciliation. 
• Practice of reconciliation without a proper follow-up review and approval mechanism can also be a significant challenge.