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The general ledger account reconciliation process for balance sheet accounts helps accountants and bookkeepers ensure that transactions are properly recorded at month-end for financial statements and effective internal control is in place.
What is Account Reconciliation?
Account reconciliation is the process of comparing general ledger accounts for the balance sheet with supporting documents like bank statements, sub-ledgers, and other underlying transaction details. If the ending balances don’t match, accountants investigate the cause of the discrepancies and make adjusting entries required to resolve differences from errors or missing transactions.
When is Account Reconciliation Done?
Accountants do account reconciliation during each monthly and year-end financial close process or in real-time using specialized automation reconciliation software integrated with an ERP. The automated reconciliation software includes a beneficial audit trail.
How Does Reconciliation in Accounting Work?
Account reconciliation works by comparing general ledger account balances for balance sheet accounts to supporting sets of records and bank statements and maintaining rolling schedules with beginning balance, additions, reductions, and ending balance for specific accounts.
Types of Reconciliation
Types of balance sheet reconciliations include:
- Cash accounts using bank statement reconciliations
- Cash equivalents
- Accounts receivable
- Fixed assets and accumulated depreciation
- Prepaid assets
- Intangible assets and amortization
- Accounts payable
- Accrued liabilities
- Income tax liabilities
- Notes payable (short-term and long-term components)
- Retained earnings
- Capital accounts
Cash accounts bank statement reconciliations
Cash account reconciliation uses a bank statement balance for each bank account and compares it to the cash account balances in the general ledger.
A bank reconciliation deals with errors and timing differences from outstanding checks or ACH transactions not yet cleared or recorded, deposits in transit not recorded by the bank or in the general ledger, and bank service fees or other items like overdrafts fees not yet recorded.
Reconcile general ledger accounts to balances of short-term investments with a maturity period of 90 days or less, using brokerage and investment firm statements or financial institutions statements. Cash equivalents include treasury bills, commercial paper, money market accounts, marketable securities, and short-term government bonds.
Accounts receivable details may not match the general ledger if customer invoices and credits are accrued and not entered individually into the aged accounts receivable journal. Customer account write-offs must be recorded against the Allowance for Doubtful Accounts, which nets against Accounts Receivable in financial statements. Mistakes in recording may also lead to discrepancies.
Recording inventory (and related accounts payable) transactions may lag, requiring accruals through a cut-off date after month-end. Physical inventories are conducted annually and through more frequent cycle counts of fewer items. Physical inventory counts must be reconciled with the general ledger, and discrepancies that can’t be resolved are recorded using journal entries.
The allowance for obsolescence and the inventory valuation at lower of cost or market are reconciling items to consider in the inventory recording and reconciliation processes.
Fixed assets and accumulated depreciation
Fixed assets should be rolled forward by ensuring that purchases, sales, retirements and disposals, and accumulated depreciation are correctly recorded. In financial records, like the general ledger and trial balance, fixed assets have a debit balance, and accumulated depreciation has a credit balance to offset fixed assets.
To verify the general ledger account for each type of prepaid asset, check the balances of prepaid assets for the beginning balance plus any transaction additions minus time passage reductions to equal the ending balance.
Prepaid assets are prepaid expenses that are capitalized as an asset when paid in cash. Prepaids are recognized gradually as an expense, using a monthly allocation with a journal entry to reduce the prepaid asset balance and record the expense on the income statement.
For example, a schedule with beginning balance, cost of new insurance policies or renewals received minus amounts amortized for time usage creates the new ending balance for prepaid insurance. The ending balance in the schedule should agree with the general ledger balance. Annual SaaS subscriptions are another example of prepaid assets amortized over twelve months as each month elapses.
Intangible assets and amortization
Types of intangible assets include goodwill and brand value from M&A, intellectual property (patents, copyrights, and trademarks), licenses, R&D, and customer lists. Based on a periodic analysis and evaluation, intangible assets like patents are amortized over time and reduced for asset impairments when necessary. Spreadsheets or an accounting software template may be used.
Accountants compare the general ledger balance for accounts payable with underlying subsidiary journals. GAAP (generally accepted accounting principles) requires accrual accounting to record accounts payable and other liabilities in the correct accounting period.
Account balances for credit card statements need to be reconciled to the appropriate payables account in the general ledger.
Real-time automated payment reconciliation reports are generated to reconcile with the general ledger when batch payment runs are completed using AP automation and global mass payments software. The automation software integrates with your ERP system.
On a spreadsheet, list general ledger accounts by name and amount included in accrued liabilities. Accrued liabilities include accrued wages and benefits, accrued payroll taxes, contingent liabilities, and other accrued liabilities.
Reconcile beginning balance, list and add new transactions, list and subtract payments or other reductions, and compute the ending balance for the period. This schedule of activity should support the general ledger ending balance for each account.
Income tax liabilities
Complete a schedule to analyze income tax liabilities. Compare income tax liabilities to the general ledger account and adjust for any identifiable differences that need recording via journal entry.
Notes payable (short-term and long-term components)
An underlying spreadsheet should have sections for short-term and long-term notes payable.
List the beginning balance for each account. Add transactions for new notes payable. Make any required adjustments between the categories based on a calculation of short-term notes payable liabilities for the next 12 months to classify amounts in the categories as short-term or long-term correctly. Calculate ending balances.
Compare to the general ledger. Make any required adjusting journal entries for general ledger balances to correctly reflect short-term and long-term notes payable components.
Shareholders’ Equity includes retained earnings and capital accounts.
A statement of retained earnings includes beginning balance plus net income (or minus loss) minus cash dividends = ending retained earnings balance. Trace the net income or loss to the income statement and trace the cash dividend issuance to verify the amounts. Compare the general ledger ending balance to the calculation of retained earnings for the period.
Using a schedule of general ledger accounts, analyze capital accounts by transaction for any additions or subtractions. The spreadsheet should include beginning balance, additions, subtractions, and any adjustments required for recording to agree with the general ledger ending balances for capital accounts.
Capital accounts activity includes par value of the common stock, paid-in capital, and treasury share transactions.
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What are the Steps in Account Reconciliation?
The cash account is reconciled to bank statements rather than a subsidiary journal (sub-ledger) for that account. Accounting software and ERP systems have built-in features and electronic forms to reconcile cash accounts with bank statements.
Steps in bank account reconciliation are:
- Enter the ending cash balance per the bank statement
- Subtract outstanding checks (not yet cleared)
- Add deposits in transit (not yet deposited)
- Add bank service fees and other bank transactions not yet recorded
- Enter the ending cash balance per the general ledger
- Calculate the difference between the cash balance per the bank statement and general ledger account
- Investigate the sources of differences and add or subtract them by type
- Inform the bank of any bank errors
- Record any general ledger entries required
The steps in balance sheet account reconciliation vary by type of account but may be generalized to include the following numbered steps.
Reconcile general ledger accounts to sub-ledgers or create a schedule of underlying transactions and list discrepancies by item (which may require recording or journal entry adjustments). The reconciliation spreadsheet should be carried forward from month to month for each yearly accounting period.
Balance sheet accounts with subsidiary ledgers (sub-ledgers) include accounts receivable, inventory, fixed assets, and accounts payable.
Balance sheet accounts reconciliation steps are:
- Compare the trial balance with the general ledger account.
- Correct any differences between the trial balance and general ledger
- Compare the general ledger account with the detailed subsidiary ledger
- Investigate discrepancies to determine the source
- For each difference identified, decide whether it should be recorded in the subsidiary ledger or the general ledger via adjusting journal entry (if an entry is required)
- Compare again to ensure that the general ledger and subsidiary ledger balances are the same for the month-end close
What are Common Account Reconciliation Discrepancies?
Common account reconciliation differences are timing differences in recording to the general ledger, outstanding and missing transactions, and transaction errors.
Transaction errors include duplicate recording of transactions in the detailed subsidiary journal that’s a sub-ledger or recording an asset as an expense.
The prior month’s journal entry accruals need to be reversed to prevent a discrepancy.
Consolidation and account reconciliation
Although a single-entity small business doesn’t need to consolidate the financial statements of multiple entities, companies engaging in M&A will need to complete a consolidation. Accountants’ consolidation processes may use automated ERP software functionality to combine results and remove intercompany transactions or use spreadsheets.
Intercompany transactions include adjusting entries for profit elimination relating to general ledger accounts like intercompany revenues, accounts receivable, fixed assets, inventory, accounts payable, and cost of sales. When reconciling balance sheet accounts, consider monthly adjusting entries relating to consolidation.
What are the Risks of Not Reconciling Bank Statements?
The risks of not reconciling bank statements to general ledger cash accounts are that fraud or errors may not be detected and financial statements used for both internal and external financial reporting may be inaccurate. Cash flow may also be affected if general ledger account balances are inaccurate.
What’s the Purpose of Account Reconciliation?
The purpose of account reconciliation for balance sheet accounts is to ensure that financial statements are materially accurate and internal control is working to prevent fraud and errors. Account reconciliation is considered part of the full accounting cycle process.
In account reconciliation, the general ledger should reflect all transactions in the proper time periods and match underlying bank statements, other external documentation, rolling accumulated depreciation schedules, sub-ledgers, and accounting analysis schedules that may be Excel spreadsheets. Financial statements should also be compared with general ledger balances for agreement in amount.
During the reconciliation process, corrections may be made to the general ledger with adjusting journal entries. Or correct the sub-ledger if an error like the duplicate recording of a transaction is a reconciling item.
The trial balance that lists and totals general ledger account balances should have equal debit and credit totals to reflect double-entry accounting and posting of all accounts to the general ledger.
Auditors review, analyze, and test client-prepared account reconciliations during the annual audit of the financial statements, trial balance, general ledger, and records.