The general ledger contains all the transactions of an entity and may include sub ledgers such as accounts payable and accounts receivable. The reconciliation of ledger accounts involves the process of comparing the transactions posted to an account in the ledger with the original supporting source documents. Since this process ensures that the resulting balance is correct and that transactions have been recorded accurately, reconciliations must be done on a regular basis so that inconsistencies or errors can be resolved efficiently. A monthly reconciliation will ensure accurate data being available for the end of the fiscal year as well as precise management accounts.

Each balance sheet account requires its own reconciliation and different financial categories of accounts will have different supporting source documents. Source documents are any documents which support an entry or balance in any of the accounts. Bank accounts are reconciled against bank statements while investment accounts are reconciled against investment statements. Accounts payable and accounts receivable are compared to the balances in the sub ledger which are in turn compared to the supplier or customer statements. Stock accounts should be verified by physical stock counts while fixed assets should be compared with the fixed asset register where additions and disposal must be supported by invoices. The fixed asset should also be physically inspected.

The following steps should be performed at the end of every month as part of the monthly closing procedures:

  • Create a reconciliation report for each account and confirm the opening balance agrees to previous the month. List the closing balance of the general ledger account in one column.

  • In another column list the closing balance as per the relevant source document.

  • Review the previous month’s reconciliation and compare reconciling items as well as the current month’s source document information by matching the date, amount, supplier or customer name and description to the entry in the ledger.

  • List and explain all amounts that create a difference between the balance per the general ledger and the balance per the supporting documentation. The account will be reconciled when all the differences have been isolated and when the explanations in respect of these differences are valid.

  • Examine reconciling items and determine whether corrections to the general ledger are required.

Reconciling items identified may be a result of items being posted to the incorrect ledger account, amounts being captured incorrectly, the incorrect date being used, transactions being processed twice or debits and credits being reversed. They may also be a result of a timing difference where a transaction is processed by only one party due to cut off deadlines being applied or payments not being presented to the bank at month end. 

Income statement accounts can also be verified. For example, the depreciation expense can be agreed to the fixed asset register, the payroll accounts can be compared to payroll reports and benefit statements. Expenses can also be compared on a month to month basis and variances investigated. 

Reconciliations enable one to analyse information from two different sources which ensures that the information of both parties remains consistent and correct. This ensures that both internal and external reporting of the financial data of the business is reliable and accurate and that errors or discrepancies can be resolved on a monthly basis.

Michelle van Coppenhagen

Associate, Johannesburg

Related articles

Tightening the ropes on your payroll control

The option of outsourcing