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

At every stage of a business, financial discipline plays a pivotal role in scripting the success story. In the absence of it, even with the best products and the team, a company may falter in achieving the desired goals. And general ledger reconciliation plays a driver’s role in practising financial discipline. 

This article explains what general ledger (GL) account reconciliation is, the processes and best practices.

What is general ledger reconciliation?

To understand what is reconciliation of the general ledger, we first need to learn about the concept of the general ledger.   

Ledger in accountancy means a book in which accountants note down details of transactions. So, a general ledger is the book that records all the financial transactions conducted during business operations within a specific time period. Earlier, such ledgers were maintained in physical format. 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 

A general ledger reflects changes - 

• Revenue 
• Expense 
• Assets 
• Liabilities 
• Equity 

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

1. Inventory ledger 
2. Sales ledger 
3. Purchase ledger 
4. Cash ledger 
5. Fixed asset ledger 
6. Account payable ledger 
7. Account receivable ledger 

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.

Importance of general ledger reconciliation

General ledger reconciliation is a critical process for maintaining flawless accounts in businesses for several reasons. 

• First, it helps a company manage its finances with the highest level of accuracy and integrity. Accurately recorded financial details are the key to complying with legal and tax regulations. Besides, financial integrity helps companies attract lenders, investors and other business partners.
• Second, 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.  
• Third, 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. 
• Fourth, general ledger account reconciliation helps regulators, auditors and management identify financial frauds and accounting malpractices. 

Purpose and objectives of GL reconciliation

GL reconciliation is essential for businesses, external regulators and other stakeholders as well. So, a company must reconcile their general ledger and the sub-ledgers with the following objectives: 

• Accurate financial accounting: The first and foremost objective of general ledger reconciliation is to ensure that every financial transaction is recorded accurately.  
• Error detection with consistency: Accounting errors are common and most of them are inadvertent mistakes originating from clerical oversights. The second objective of GL reconciliation is to detect such errors in sub-ledgers and rectify them before such discrepancies go out of proportion. 
• Fraud and theft detection: A business may suffer from thefts and frauds by unscrupulous partners. Regular general ledger reconciliation can safeguard companies from such financial risks.
• Assessing financial health: Once we are certain about accuracy and consistency in financial records keeping, general ledger reconciliation serves the purpose of portraying the financial health of the business. 

Types of general ledger reconciliation

General ledger reconciliation can be of five types: 

1. 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. 
2. 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. 
3. 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. 
4. 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. 
5. 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 compare accounts and entries. 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 take official approval of 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 US$ 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.  

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