Getting to Know the Workhorse: The Ledger to Subledger Reconciliation

I have always wanted to write about account reconciliations (what, you don’t?).  They are truly the back office workhorse—indispensable yet unglamorous.  The act of reconciling accounts is heavily relied upon as a financial control, but the content in the reconciliation doesn’t always get enough attention.

I gave my first account reconciliation training in 2007 with a friend and colleague, Kristen K.  We taught a group of very smart supervisors and managers from a publicly traded company the right way to reconcile accounts.  In the ensuing years, I continue to come across problematic reconciliations.  And although they are from different organizations and are handled by different people, these recs share many of the same problems.  It’s fascinating that an account reconciliation, which is typically thought of as something so basic, so fundamental, very often does not accomplish its objective (help ensure financial statement accuracy by surfacing errors) because of the way it is prepared.

So let’s talk about one type of reconciliation, the subledger to general ledger rec, which should be done for all accounts that have some sort of subledger (AR and AP are used as examples below, but others include inventory, fixed assets, payroll, etc.).  The important thing is that you must agree the GL period end balance to the subledger period end balance.

Now why is that important?  When you agree GL balance to the subledger balance, you will flush out these major errors:

1. Improper manipulation of the subledger – The subledger records information on a real-time basis and time stamps transactions.  Manually back-dated adjustments (i.e., unusual and suspicious) will typically not interface to the GL.  Those transactions will become evident during the reconciliation process since they will fall through as discrepancies to be investigated further.
2. Data dropped during the subledger to GL interface – The subledger, which contains the order level information, is either automatically or manually interfaced with the GL.  The interface may not be working properly 100% of the time.  Or, the interface process may flag a transaction as an exception and refuses to pass it through to the GL.  This type of reconciliation will catch and fix the “drop outs.”
3. Incorrect manual journal entries – In a GL to subledger rec, you are forced to list out all transactions in the GL that are not reflect in the subledger.  These transactions will almost always be manual journal entries, which are more prone to errors.  By highlighting them, you will have a better chance of catching an unusual and possibly incorrect journal entry.

Here is a helpful diagram:

The Back Office Mechanics Blog by Nancy Wu is licensed under a Creative Commons Attribution-Share Alike 3.0 United States License.

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