If you work in an accounting or finance position, chances are you’ll be required to participate in reconciling the general ledger. If you’ve never reconciled a general ledger, then you’ll appreciate this brief general ledger tutorial.
What is the general ledger (GL)?
The general ledger is the set of all the accounts used to keep track of all the financial transactions of a company. The general ledger is comprised of five types of accounts: assets, liabilities, owner’s equity, revenue and expense. When a transaction occurs, it always affects at least two of these account types.
How Does the General Ledger Get Distributed?
Continuing our general ledger tutorial, there is usually one department (for example, the General Accounting department) that is responsible for maintaining and distributing the general ledger to every other department in the company. Each department receives the portion of the GL that contains the accounts assigned to their department code. The general ledger report may be accessed online, or it may be distributed to you in paper format. This distribution usually occurs a few days after each month ends.
What Needs to Be Done with the General Ledger?
Each month, the GL should be:
1. Reconciled.
2. Reviewed.
3. Signed (approved) and dated by the individual performing the reconciliation.
This general ledger tutorial focuses on the person reconciling the GL. The person that reconciles should be someone in the department who does not have the authority to approve invoices and transactions. Also it would be best if this person is not involved with ordering or receiving goods. This ensures a system of check and balances in order to prevent fraudulent activity.
General Ledger Tutorial, Steps for Reconciliation
Reconciliation means comparing and reviewing source documents (such as invoices, receipts, etc.) against their corresponding entry into the general ledger and expecting a match as to dollar amount, vendor, and source document/invoice number.
Below are some possible steps to follow if you are being asked to reconcile the GL:
1. Start the monthly reconciliation process by reviewing the previous month’s ledger and any notes you may have made. Then look at the current ledger to verify that all correcting entries were actually made.
2. Compare copies of deposit documentation to the general ledger to see if the corresponding dollar amounts were recorded correctly. If you have documentation for a deposit that does not appear on the ledger, it may be that the deposit occurred too late to be posted for the month you are reconciling. However, if you have documentation for receipts that were not recorded but should have been, notify the General Accounting department. On each deposit document matched to the general ledger, note the month and year it was posted to the ledger, and initial and date it.
3. For each expenditure shown on the general ledger, verify that you have the appropriate back-up documentation. Back-up documentation includes invoices, packing slips, copies of financial journals, and any other information relevant to the transaction. For reoccurring items where no documentation is available, verify the amount looks reasonable and initial next to the charge. If you have an expenditure on the ledger which does not belong to your department, you will need to process a correction for the expense. When looking at each charge, compare the vendor name and invoice amount to your back-up documentation. If all fields agree, make a checkmark next to the amount on the ledger. Sign your initials on the documentation and add the month and year the item appeared in the ledger.
4. Once you have reconciled all of the transactions shown in the general ledger report, you can file away all the corresponding documentation in a file folder labeled “Reconciled”. It is a smart idea to create a separate folder for each month of the year.
General Ledger Tutorial Conclusion, Review and Signing
After reconciling the general ledger, a review should be completed. The monthly review should be done by someone in the department who is familiar with the department’s transactions and will be able to detect any errors or problems. Whenever possible this should be a different person than the individual doing the reconciling of the general ledger. A reviewer will look for additional items including:
1. Unusual transactions and expenditures.
2. Duplicate or erroneous payments.
3. Correct payment information.
4. Reasonableness of transactions.
5. Transactions are in line with company policies.
Once the review is complete and all items have been corrected, the general ledger can be signed off on (indicating approval and completion), and dated by the individual who performed the reconciliation.
Source: UCSB Procedure Manual
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