Reconciliation of the general ledger to sub-ledgers is another type we will review. The general ledger (or simply "ledger" or "G/L") is a collection of all balance sheet and income statement accounts. The general ledger also contains all journal entries posted to accounts. In currently computerized world, the ledger is maintained in an electronic form.
A sub-ledger is a thorough record of transactions for an individual account. Usually, a sub-ledger contains detail of transactions for an account, which are summarized through day (or month) and the total is then posted to the general ledger. Therefore, sub-ledgers serve as support for amounts posted to the general ledger. Sub-ledgers are presented in an electronic form as well (e.g. Excel file, detail of an account in QuickBooks, SAP or Oracle). For instance, accounts receivable sub-ledger may contain detail for all issued invoices and cash receipts. At the end of a day, an accountant can summarize all invoices issued (sales) and cash receipts (cash collections) and post them to the general ledger in two separate journal entries. The general ledger would not contain detail for each individual transaction.
As there is always opportunity for a human mistake, it is important to reconcile the general ledger balances to the sub-ledger balances on a periodic basis to spot such mistakes. If there are no mistakes in posting journal entries to the general ledger, then the two balances will match; still, if there are differences, then there would be reconciling items, which require towards remain scrutinized and corrected, if necessary. Two important accounts that must be reconciled on a monthly basis are accounts receivable and accounts payable.
Let's now take a look at a four step approach for an accounts receivable reconciliation and an accounts payable reconciliation.
Step 1: Compare G/L balance to the sub-ledger balance
You must start by scrutinizing the G/L and sub-ledger balances to recognize any differences. While doing that, pay special attention to the transactions that are unusual in their nature. For example, non-recurring transactions might have a higher risk of a mistake than transactions completed on recurring and regular basis. You must examine the sales journal (for receivables) and the purchases journal (for payables); have a look at posted entries, which were posted to the wrong account, transactions posted twice (duplication error), transposition errors, etc. Then you must look at the cash receipts and cash payments journals (for receivables and payables, respectively). Probably, you will require to repeat with your examination of the invoice register for accounts receivable and the purchase order journal for accounts payable.
Step 2: Investigate reasons for the difference
After you have compared the G/L and sub-ledger and found modifications, you must investigate reasons for them. Reasons for the difference can contain the following:
Some of these items require adjustments to the G/L while others need adjustments to the sub-ledger.
Step 3: Adjust G/L and/or sub-ledger
The next step is to make essential adjustments to the G/L or to sub-ledger(s) based on the reconciliation to precise any errors, omissions, etc. To recognize what requirements to be adjusted, you could use the template of the general ledger to sub-ledger reconciliation statement presented above.
Step 4: Compare adjusted balances
Finally, compare G/L balance to sub-ledger balance again, after all necessary adjustments were made. If reconciling items are resolved, the reconciliation procedure is completed. If there is a difference, continue to examine the sub-ledger and journals that are a part of the revenue and expenditure cycles to recognize the problem and correct it.
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