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General Ledger Reconciliation and Analysis

See also:
Account Reconciliation
Standard Chart of Accounts
Problems in Chart of Account Design
Cash Flow Statement
Income Statement
Subsidiary Ledger

General Ledger Reconciliation and Analysis Definition

Define a general ledger as the financial record of every transaction of a company. Commonly, it is referred to as the “books” of the company. In the general ledger, record each of the transactions twice as both a subtraction (debit) and addition (credit). The general ledger is the main accounting record of the company.

Consequently, general ledger reconciliation is the process of ensuring that accounts contained in the general ledger are correct. In short, reconciliation makes sure you place the appropriate credit and debit in the associated accounts. Seemingly simple, this process requires an experienced bookkeeper when applied to small companies. Complicated applications require the hand of a trained CFO or equivalent controller. In either situation, a general ledger reconciliation policy must by enacted to ensure consistency.


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General Ledger Reconciliation Explanation

Not every general ledger account has a detail subsidiary ledger to reconcile to. Monthly all balance sheet accounts should be analyzed for accuracy. In addition, periodically it may be necessary to reconcile revenue accounts, expense accounts and miscellaneous balance sheet accounts.

In these cases the procedures are similar to reconciling an account to a subsidiary ledger. Print a detail general ledger transaction report for the account. Then, eliminate reversing journal entries correcting errors. Finally, investigate any transactions that are unusual in nature. For example a debit entry or decrease to a revenue account would be unusual.

Finally, prepare a detailed schedule of transactions remaining in the final balance.

General Ledger Reconciliation Process

Some wonder “what is general ledger reconciliation?”. Others wonder how to do general ledger reconciliation. For bookkeepers, adhere to the following process:

First, study the accounting policy of the company. Ignorance to this is missing the essential foundation of the process; knowing the rules is key.

Then, gather information. These include receipts, invoices, account statements, invoices, and related financial reports. This data is the information the accounting staff puts into accounts.

Third, ask questions about the accounts. What items did the company purchase? Do they relate to company policy? Why are they included in the given account? When were they spent/made?

Finally, document your work. Proper documentation ensures properly reconciled accounts as much as it ensures effective bookkeeping in the first place.

General Ledger Reconciliation Template

A general ledger reconciliations template can be found at: Microsoft Templates.

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Periodic inventory System

 

Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 23, 2013. 

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Problems in Chart of Accounts Design

See also:
Standard Chart of Accounts
Chart of Accounts (COA)
Complex COA Number for SGA Expenses
Example Chart of Accounts for Selling General and Administrative
Time Saving Tip for Filing Vendor Invoices

Problems in Chart of Accounts Design

Too Many General Ledger Accounts

Often when using QuickBooks or Peachtree accounting software the number of general ledger accounts grow over time. Usually the person entering the data is not a trained accountant. When faced with an accounting entry that is not specifically described by an existing general ledger account they will often set up a new account. It is especially easy to do in QuickBooks.

Too Much Detail in Selling General and Administrative Expenses

Similar to the problem mentioned above, often the person maintaining the general ledger is a detail oriented employee. This trait is both a blessing and a curse. The theory goes as follows: If a little detail is good then a lot is better! In order to get more and more detail on the general ledger they set up new general ledger accounts. In the end they are counting paperclips with numerous accounts with less than a thousand dollars charged to them.

Not Enough Detail in Revenue and Cost of Goods Sold Categories

Often revenue consists of one line item labeled “Sales” and “Cost of Goods Sold” as another line item. On the other hand there is considerable detail in Selling General and Administrative expenses. Most accountants manage profitability by controlling costs, however, you can create more value by managing “above the line” or gross margin.

Cost of Goods Sold Not Aligned with Revenue

It is not uncommon to see revenue sorted by product or category and the Cost of Goods Sold being tracked under a different segregation. You should sort revenue and Cost of Goods Sold by the same methodology so you can manage gross profit by category.

No Logic in Assigning General Ledger Account Numbers

Account numbers, especially in Selling General and Administrative expenses, are not assigned in any logical order. Accounts are not entered alphabetically or within a logical grouping. Consequently, it is difficult for the clerical staff to code payables properly or consistently.

Poor Titles on General Ledger Account Descriptions

In some instances, you may use acronyms to title accounts. This makes it difficult for a reader of the financial statements to decipher the accounts.

Inadequate Detail in Chart of Accounts

Too little detail in the chart of accounts can be as bad as having too much. An example is having two inventory subsidiary ledgers posting to one general ledger control account making reconciliation difficult.

No Departments, Product Lines or Regional Data Tracked

Part of a company’s strategic plan should be to manage growth and profitability by major categories. By putting this level of detail in the general ledger, you will refocus management’s focus or target on strategic goals.

Chart of Accounts Does Not Relate Back to Pricing Model

In bidding jobs or quoting sales orders it is important to estimate indirect overhead or direct overhead. If you do not compare these estimates to actual results, then over time profitability may suffer.

Using the Chart of Accounts for Job Costing

In companies where job costing is important it is common to see the Chart of Accounts used to track job cost. This is a result of not setting up the accounting software properly or not purchasing the appropriate accounting software package.

No Standard Chart of Accounts for Different Companies

In this situation multiple companies are either formed or acquired over time. Because they are often in different industries, use a different Chart of Accounts for each company. It would be preferable to use a standard Chart of Accounts customized in the few areas necessary.

Too Many Digits in Chart of Accounts Numbering

Accountants trained in a large company environment often bring that same logic to an entrepreneurial company. The result is an account numbering system six or more digits long. Most modern day accounting software use departmental accounting making the required digits to be no more than five.

Not Using a Numbering System

QuickBooks is great accounting software for beginners and non-accountants. Consequently, use an alpha system to establish the Chart of Accounts. This practice makes it difficult to sort accounts in anything other than alphabetical order.

Using Alpha Numeric Chart of Accounts

Another problem is using a combination of alpha/numeric accounts. Just as using alpha only systems causes organization problems so does a combination of alpha/numeric.

Not Leaving Gaps in the Numbering System

When you set up a chart of accounts for the first time, assign account numbers sequentially. Later when you want to add an account in alphabetical order there is not a gap in the numbering system to allow you to insert the new account.

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Problems in Chart of Accounts Design

 

Problems in Chart of Accounts Design

11

Chart of Accounts (COA)

See also:
Problems in Chart of Account Design
Complex COA Number for SGA Expenses
Example Chart of Accounts for Selling General and Administrative
Account Reconciliation
Account Reconcilement Definition

Chart of Accounts Defined

The chart of accounts (COA) is a listing of the general ledger accounts used by an organization to record transactions. For example, the accounts may be labeled in a numeric, alpha or alpha-numeric manner depending on the preference of management and the limitations of the accounting software. Today accounting software can accommodate most formats. In addition, list the accounts in the order that they appear on the financial statements; balance sheet accounts first, then income statement accounts.

The requirements of a company’s standard chart of accounts are one of the most important factors in software selection decision process. Define the requirements of the general ledger chart of accounts during the “Needs Analysis Phase (NAP)” of system selection and design. Therefore, involve the NAP every member of the management team that will be relying on financial data to help them manage their area of responsibility. The chart of accounts format and the selection of accounts provide sufficient data to manage the business. But it must meet all of the requirements of appropriate regulatory agencies. In addition, it must avoid minutia. A basic accounting chart of accounts system will provide for efficient expansion/modification of the management information systems as managers’ needs change based on changes in the business environment.

Chart of Accounts Design

The driving force in the chart of accounts design should be management’s information requirements, and not for example, the IRS Form 1120. An example of factors to be considered when determining the chart of accounts design include the present or future need for:

• Departmental data
• Project data (Expense & Production/Billable Projects)
• Regional data
Product line data
Customer data
Internal Revenue Service (i.e. details of travel & entertainment expenses, expenses eligible for research tax credits, and non-deductible expenses)
• Local taxing authority requirements, i.e.. location of property & equipment by taxing jurisdiction
• Primary profit drivers
• Measure strategic goals
• Other significant factors identified by management

Not all factors identified, will survive the final decision of the required composition of the financial data base. The factors identified which survive the cut, will determine the required number of fields and size of the account number, thus eliminating software that does not provide the required flexibility. The overriding goal is to keep the chart of accounts format simple, logical, and scalable.

General Ledger Chart of Accounts Numbering System

Once you have identified the chart of accounts structure, certain classes are generally followed to develop the specific account codes, as shown in the following sample chart of accounts below. Furthermore, the numbering of the accounts should incorporate some logic in order to make it easier for non-accountants to code transactions. For example, group the accounts by category (i.e.; overhead) then listed in alphabetical order.

1NNNNN..NN – Assets Assets are generally numbered in order of liquidity of assets, i.e. 11NNN..NN as Cash, 12NNN… NN as Accounts Receivable, and so on.

However there may be exceptions, as some industries, such as public utilities reserve the 11NNN..NN sequence for the cost of Property, Plant and Equipment, as such assets dominate the balance sheet.

2NNNNN..NN – Liabilities

3NNNNN..NN – Owners/Shareholders Equities

4NNNNN..NN – Revenues

5NNNNN..NN – Cost of Goods Sold & Services

6NNNNN..NN – Selling, and General & Administrative Expenses

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9

Most General Ledger Accounts Still Reconciled Manually

The Financial Executives Research Foundation (FERF) and Robert Half recently put out a report. According to a recent AccountingWEB article, 65% of US companies still use some form of manual accounting system. One of the chief reasons for a company to utilize manual account reconciliations is the growing number of general ledger accounts companies use.

Today’s user-friendly accounting software packages make it very easy to add new accounts. Companies often only use those accounts for one or two transactions. Then, the accounting department forgets about those accounts. Often, the person entering the data is not a trained accountant. When faced with an accounting entry not specifically described by an existing general ledger account, they will set up a new account.  So what’s the solution?  Keep the chart of accounts format simple, logical, and scalable.

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Most General Ledger Accounts Still Reconciled Manually

The article goes on to suggest other ways to streamline the close process. This includes the utilization of third-party software for account reconciliation as well as better process design and execution. The goal: spend less time generating the numbers and more time analyzing the numbers. Here’s the full article:

If you think automation is primarily being used to reconcile the general ledger accounts of public and private companies in the United States and Canada, [then] think again.

Nearly two-thirds of finance departments in US companies and one-half in Canadian companies are still using a manual accounting system, according to Benchmarking the Finance Function 2013: The Inner Workings of Accounting and Finance, the fourth annual report from the Financial Executives Research Foundation (FERF) and Robert Half, which provides insight into professional standards across the finance function.

“The level of manual reconciliation reported in our survey is surprising; however, we’ve seen this same consistent response in the four years we have conducted the study,” Paul McDonald… [McDonald is the] senior executive director for Robert Half… “The most progressive companies are moving toward automating the process through in-house systems or Cloud and software-as-a-service solutions.”

[Rising Number of General Ledger Accounts]

Finance departments at companies of all sizes are grappling with growing numbers of general ledger accounts. Of the nearly 200 American and Canadian companies surveyed, more than half say they have 500-plus general ledger accounts. Ten percent of US companies and 20[%] of Canadian companies report they have upward of 3,000 general ledger accounts.

As business grows more complex, the number of accounts that need to reconcile on at least a quarterly basis. Twenty-three percent of US-based companies and 19[%] of Canadian businesses surveyed indicate they reconcile anywhere from 500 accounts to more than 10,000 accounts.

While many of the company executives interviewed… advocate automating the closing of the books, 65[%] of US companies and 50[%] of Canadian companies are still manually reconciling accounts. Only 12[%] of US companies and 23[%] of Canadian companies surveyed use third-party software for account reconciliation, while 23[%] of American businesses and 27[%] of Canadian firms have implemented internally developed systems.

[Streamlining the Close]

According to the report, some executives at smaller companies are not convinced that available technology for automating the close is sufficiently tailored to their needs. They expressed concerns that their teams could end up expending more time and resources setting up a custom software package than it would take to continue with a manual process.

However, organizations like Sonetics Corporation, a Portland, Oregon–based wireless communications manufacturer, and Northern Contours Inc., a manufacturing firm in St. Paul, Minnesota, report that using an automated system gives them a competitive advantage over companies that are bogged down in the process[; thus,] allowing their finance departments to utilize resources in higher-value activities.

“It currently takes fifteen days for us to produce the year-end statement… I’d like to get that down to eleven days,” Mike Williams, vice president of finance for Sonetics… “I’m looking to maximize our opportunities and add value to our forward-looking activities.”

[Reporting Process]

Angela Riley, CFO of Northern Contours, states the company has placed a greater emphasis on the reporting process… [The company is] increasingly turning to automation tools.

“We’ve reduced the time it takes to produce our monthly, quarterly, and annual financial statements by nearly 50[%],” she says in the report.

Account reconciliation is still a manual process at Employee Benefits Corporation, a third-party administrator of financial services in Middleton, Wisconsin. However, according to Don Tuscany… the company has started to incorporate more automated processes in its financial reporting. [Tuscany is the vice president of finance and CFO]

“We’re getting closer to the amount of automation I’d like to see us have,” he says in the report.

Using technology may not be the only answer for streamlining the close. Process design and execution play key roles, as well. When Canadian Western Bank Group… instituted its new general ledger system, it implemented a more effective process to create and post entries. This process has helped reduce the number of reconciliations.

“We don’t have as many intracompany reconciliations because we are able to get the entries right the first time…” 

[About the Survey:]

In November 2012, FERF and Robert Half conducted their fourth annual benchmarking survey of finance departments at 192 public and private companies in the United States and Canada. The data contained within this report were compiled from responses to a forty-eight-question online survey. More than half (58[%]) of the respondents identified themselves as CFOs, and the majority (81[%]) were located in the United States, while 19[%] were located in Canada.

Find the original article here.

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0

Common Problems in Charts of Account

Accountants are often great at, well, accounting, but tend to get lost in the detail, preferring to count expenses down to the paper clip level instead of focusing on what truly matters for a company’s profitability. Nowhere is that more evident than in the chart of accounts they create. What are some common problems in charts of account? Let’s dive into it below

Common Problems in Charts of Account Design

Here’s a look at the common problems in charts of account and some recommendations for improvement:

Too Many General Ledger Accounts

Often when using QuickBooks or Peachtree accounting software the number of general ledger accounts grow over time. Usually the person entering the data is not a trained accountant. When faced with an accounting entry not specifically described by an existing general ledger account, they will often set up a new account. It is especially easy to do in QuickBooks.

Too Much Detail in Selling General and Administrative Expenses

Similar to the problem mentioned above, often the person maintaining the general ledger is a detail oriented employee. This trait is both a blessing and a curse. The theory goes as follows: If a little detail is good then a lot is better! In order to get more and more detail on the general ledger they set up new general ledger accounts. In the end they are counting paperclips with numerous accounts with less than a thousand dollars charged to them….”

If you want to add more value to your organization, then click here to download the Know Your Economics Worksheet.

Common Problems in Charts of Account

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Common Problems in Charts of Account

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