General Ledger Reconciliation: A Step-by-Step Guide to Automate
The general ledger is a crucial financial document for banking and non-banking institutions. It must be accurate, updated, and audited regularly to avoid risks and discrepancies, and the general ledger reconciliation process ensures this.
In the past, the general ledger used to be a physical book of accounts that maintained the records of each financial transaction of the organization. The physical ledger later became a huge spreadsheet that kept all the records digitally. However, both required manual efforts to process high-volume transactions and were prone to errors.
Studies show that more than 88% spreadsheets have errors, and the error rate for manual data entry is between 1% and 4%. The number might seem low, but for organizations that handle millions of transactions daily, it is very significant and can lead to serious risks.
Therefore, automated systems are the way to go. They smoothen the reconciliation process by reducing manual efforts, spotting errors and discrepancies quickly, and streamlining the workflow to create 100% accurate reports. Powerful platforms like Osfin also offer real-time visibility of cashflows with an interactive dashboard where you can track each transaction, optimizing the overall reconciliation process.
This article highlights all you need to know about General Ledger Reconciliation and provides a step-by-step guide to automate the process.
What is a General Ledger?
A general ledger (GL) is a centralized place for maintaining detailed records of an organization's financial transactions during a specific period. Traditionally, ‘ledgers’ were physical books where business transactions were recorded, but nowadays companies maintain the data in Excel sheets or software systems.
Financial institutions like banks and credit unions maintain a record of their customers’ credit and debit transactions in their general ledger. It stores information from various bank branches, transaction apps, wallets, ATMs, websites, etc., and conducts regular checks and updates to ensure the data is accurate.
Banks and fintechs have to handle huge volumes of data every day. Therefore, most of them use powerful core automation systems to have an organized account of their customers’ financial activities.
Their ledger consists of a chart of accounts for different kinds of transactions, like loan accounts, savings accounts, capital accounts, interest expense, etc. Under each account, there are journal entries for each transaction with the date, amount debited or credited, and other details. It also includes sub-ledgers that record and support the information on the main ledger.
The general ledger for non-banking organizations is quite different. It includes all the financial transactions chronologically organized into different accounts, and it can also include sub-ledgers. It provides detailed information about the company’s assets, liabilities, equity, revenue, and expenses.
A general ledger for most businesses would include sub-ledgers like:
1. Sales ledger
2. Inventory ledger
3. Purchase ledger
4. Cash ledger
5. Account Payable ledger
6. Accounts Receivable ledger
7. Fixed asset ledger, and more.
Usually, the accounts team of a company handles the general ledger and maintains records of every transaction and expense. It contains crucial financial data that can be used to create reports such as balance sheets and income statements.
It helps to understand the company’s performance over time, identify changes, and helps CEOs make informed decisions.
What is General Ledger Reconciliation?
General ledger reconciliation involves comparing the records of the general ledger with the sub-ledgers and other supporting documents like invoices, bank statements, receipts, etc., and verifying the accuracy of all the transactions. The process is a kind of double-checking to ensure that everything adds up across all the ledgers.
It also helps you spot and resolve any discrepancies, mismatches, or potential threats. Companies need to go through this process occasionally so that these problems can be resolved at the earliest.
An accurate general ledger reconciliation provides a clear picture of the company’s finances, highlights any risk or threat, and helps make sound business decisions.
In today’s world, growing businesses mostly automate the general ledger reconciliation process to achieve faster, error-free, and accurate results.
General Ledger Reconciliation Example
Let’s consider this example to understand what general ledger reconciliation is. An e-commerce company uses multiple platforms to collect customer payments. On a particular day, the company’s general ledger records $1,200,000 in total sales receipts for that day.
Sub-ledger Entries (Payment Channels):
- Shopify Payments: $500,000
- PayPal: $400,000
- Square: $250,000
Total from Sub-ledgers: $1,150,000
General Ledger Entry: $1,200,000
Discrepancy: $50,000
During the reconciliation process, the finance team uses automation software to match transaction data. The tool flags the $50,000 mismatch and traces it to a failed API sync from Square, where a batch of end-of-day sales hadn’t been captured.
Once the missing transactions are pulled in, the system updates the sub-ledger and reconciles it with the general ledger, closing the gap. This prevents reporting delays and keeps financial records accurate and audit-ready.
Benefits of General Ledger Reconciliation
These are the benefits of conducting the general ledger reconciliation process:
1. Ensures accuracy
General ledger reconciliation accurately represents the financial health of a company. Banks and fintechs ensure that every transaction of their clients’ accounts are accounted for and balanced. This way, they can track customers’ financial activities accurately.
2. Helps prevent errors
This process helps identify and prevent errors and risks such as potential fraud, data entry errors, double spending, etc. Reconciliation can prevent these mistakes from spiraling into serious bottlenecks and causing bigger problems in the future.
For financial institutions, it is a matter of trust. They are responsible for maintaining accurate records of their customer’s accounts, and any mistake can damage their reputation and reliability. Reconciliation helps avoid it and provide better and more reliable service to their customers.
3. Promotes better decision-making
Accurate financial data helps a company’s management and stakeholders make more informed decisions about planning strategies, budgeting, and maintaining other processes.
Banks and fintechs benefit in this aspect as well. The reconciliation process helps them determine their income and liabilities. It can help in spotting risks, like unusual activities, bad investments, over-lending, and non-compliance, and tackle them accordingly.
4. Builds confidence
It can develop confidence among the company’s investors, creditors, and other stakeholders. Providing accurate financial information also helps banks build trust with their customers and ensure reliable service.
5. Optimize the process
This process helps optimize the overall process and fine-tune important aspects like cash flow, internal control framework, and financial reporting. It also helps banks and fintechs improve their financial operations, reduce operational costs, promote audit readiness, and achieve a productive and efficient workflow.
Types of General Ledger Reconciliation
Types of General Ledger Reconciliation for Non-banking organizations:
1. Bank Reconciliation: This process involves comparing the general ledger with the bank statements to spot and reconcile errors or discrepancies such as outstanding checks, unpaid fees, etc.
2. Vendor Reconciliation: Involves checking the vendors’ bills and invoices, and whether the payments have been made. This process ensures that the AR balance ledger matches the vendor’s records. It also helps resolve conflicts or issues of overpayment with suppliers.
3. Customer Reconciliation: It requires verifying whether the invoices raised by the company balance the payments received from customers and helps maintain proper sales records.
4. Fixed Asset Reconciliation: This involves verifying the accuracy of the company’s accounting records and fixed assets by comparing the general ledger balance with the fixed asset sub-ledger. It helps resolve errors and discrepancies and maintain the integrity of financial statements.
5. Inter-company Reconciliation: Involves verifying and reconciling the transactions between a parent company and its subsidiaries. It helps identify and resolve imbalances and represents the parent company’s overall financial health.
6. Department-specific Reconciliation: This requires matching the company’s department-specific sub-accounts. They may include salaries, marketing expenses, sales, inventory, etc.
Types of General Ledger Reconciliation for Banks and Fintechs:
1. Account Reconciliation: This process involves comparing the financial statements of customers’ accounts with the internal records of the bank to ensure that the balance is correct and free of any discrepancies.
2. Balance Reconciliation: Financial institutions deal with customer’s money that is moved around various systems, like payment gateways, wallets, partner banks, etc. Balance reconciliation ensures that the balance maintained in the bank’s platform matches the money held in all the systems, and there are no mismatches.
3. Transaction Matching: This process involves matching each transaction recorded in the bank’s system with the transactions in other systems like payment gateways, wallet apps, and partner banks, to verify them in terms of amount, time, and reference details, and ensure that there are no discrepancies.
How is General Ledger Reconciliation Performed?
The General Ledger Reconciliation process usually begins at the end of each accounting period. It can be performed monthly, quarterly, or annually, as your company requires. Your accountants must check every account in the general ledger and compare it with supporting documents to identify errors and make sure that everything is accurate.
They must follow some of these steps to complete the process.
1. Gather all the company's financial transaction documents, like bank statements, invoices, receipts, etc.
2. Check all the items in the entries, like sub-accounts and individual entries that must be reconciled.
3. Compare all the general ledger entries with the supporting documents and check for discrepancies or errors.
4. Resolve the errors and discrepancies and document the process.
5. Once all the sub-ledger entries match the general ledger entries accurately, you can finalize and release the general ledger. In big companies, accountants will have to get the approval of the management and stakeholders to finalize the general ledger.
You should also ensure the documentation of the entire process, including the identification and resolution process of differences. It will help perform audits and for internal control purposes.
Challenges of General Ledger Reconciliation
Here are some challenges that companies might face while conducting general ledger reconciliation:
1. Manual Efforts: Manual reconciliation of a large amount of data can be overwhelming, effort-intensive, time-consuming, and prone to errors.
2. Processing complex transactions: For large companies, the system is more complicated as they deal with voluminous transactions including multiple payment methods, and exchange rates. Any error can cause serious imbalances in the financial statement.
3. Lack of standard procedures: Irregular practice or an absence of a standard reconciliation process can cause errors and discrepancies. Lack of an approval or follow-up system after completing the process can also lead to many issues. It can cause mistrust between management and stakeholders.
4. Missing documents: If the company lacks a document maintenance system, important papers and financial statements can go missing, be misplaced, or even be leaked. This is why the company must ensure that a standardized document storage and maintenance system is in place.
Step-by-Step Automation of General Ledger Reconciliation
Do you want to eliminate the above challenges and have an enhanced and more productive system? Automation software is the solution.
It can digitize and automate all the processes, making it faster, more efficient, and risk-free. Automation systems have many powerful features like cloud management solutions, automated data matching, error detection, real-time data processing, AI capabilities, and more. Here is how these features can help you automate your general ledger reconciliation process:
Step 1. Gathering Data Made Easier
Collecting the transaction documents manually can be tiring and time-consuming. Automation can ease this process by extracting data from various sources like bank statements, invoices, payable and receivable accounts, etc. It will standardize the data collection system, saving accountants from the tedious manual process.
Step 2. Automated Data Matching
Manually comparing and matching the data can be time-consuming and prone to errors. Automated data matching features can compare data across different sources. It can easily locate the sub-accounts, compare them with the general ledger entries, and flag any potential issues accurately.
Large organizations have to deal with different types of files and formats of data stored in various sources. Automation helps in seamless file conversion, ensuring that all the formats and columns are mapped correctly, and flagging issues in case of mismatches.
Step 3. Detect and Resolve errors easily
Manual processes may be prone to errors, such as double payment, missing or incorrect transaction recording, or a difference in the timing of the transaction recording. Automation platforms like Osfin can avoid them easily by identifying discrepancies and errors accurately and tagging them with appropriate reasons and causes. It saves time, prevents further escalation of risks, and makes the reports audit-ready.
Step 4. End-to-end Workflow Automation
Automated systems improve the speed and accuracy of the overall process, thus creating a smoother workflow. It reduces manual efforts and promotes better productivity and efficiency.
Step 5. Create Comprehensive Reports
With the help of an automated system, you can create a comprehensive and error-free financial report for your company. Maintaining an accurate financial report ensures that the company meets regulatory requirements and that its financial statements are reliable.
Looking for an AI-powered real-time dashboard to help you track transactions and reconciliations as they happen? Book a demo with Osfin.ai today and learn how our real-time dashboard can help you improve reconciliation accuracy!
Automating General Ledger Reconciliation With Osfin.ai
Choosing the right general ledger automation is essential to manage your workload and automate the processes. Most general automation software will fail to provide the desired results.
This is when Osfin AI comes to the rescue. It is a comprehensive finance automation platform that can ease the complex reconciliation processes and improve productivity. Leveraging an intelligent machine engine, Osfin AI processes multi-source data integration through pre-built connectors to reconcile high-volume transaction records with 100% accuracy.
From data extraction to problem solving, Osfin manages end-to-end workflow automation with speed and expertise. It offers interactive dashboards for real-time views, 170+ pre-built data integrations, and does all the operational heavy-lifting to reduce manual overhead and risks in the general ledger reconciliation process.
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Frequently Asked Questions
1. What is general ledger reconciliation?
It is the process of matching transactions of the general ledger with the sub-ledgers to check the accuracy of the financial statements. It also involves error identification and resolution to maintain the accurate depiction of a company’s financial health.
2. How can you automate general ledger reconciliation?
You can automate the process by integrating it with a financial reconciliation platform like Osfin AI, which uses powerful AI and ML models to ingest high-volume data and real-time processing and provides faster and more accurate results.
3. What are the challenges of manual reconciliation?
Manual reconciliation processes are time-consuming, error-prone, and redundant for managing high-volume data. It also involves higher overhead costs for maintaining a team and the efforts required to manage the processes. Automated systems help solve all these issues while boosting accuracy, productivity, and efficiency.
4. Can automated systems help manage multiple currencies for General Ledger Reconciliation?
Finance automation platforms like Osfin AI can handle complicated transactions across multiple currencies and maintain precise records.
