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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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Is your closing process as efficient as it could be? Access our Complete Monthly Close Checklist to use when closing your company’s or your client’s monthly books.

Periodic inventory System

 

Overhead Expense Reduction

Originally posted by Jim Wilkinson on July 23, 2013. 

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Accounting Fraud Prevention Using Quickbooks

See Also:
Accounting Depreciation
Account Reconciliation
Cash Flow Projections
How to Develop a Daily Cash Report
Future of the Accounting Workforce

Accounting Fraud Prevention Using Quickbooks

A small business owner typically cannot afford to hire enough people to have proper separation of duties to gain the internal controls needed to prevent accounting fraud.

Using Internal Controls

Stephen King, CEO of GrowthForce, says that, “Internal controls can help reduce the risk of fraud, make it easier to train and manage staff, and help your company run efficiently by having solid processes and control activities in place.” The place where most companies encounter fraud is in their own company, so it’s critical that every company sets up internal controls and continues to update them as changes occur.


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Prevent Accounting Fraud

Every business owner can achieve accounting fraud prevention by taking these simple steps:

1. Open the Bank Statement Yourself

Every small business owner should receive the unopened bank statement. Then they should review each check for authorized payee and signature and approve electronic payments. Only after they do the above should they give it to the bookkeeper.

2. Don’t Let Your Bookkeeper Reconcile the Bank Account

The person who pays the bills should never reconcile the bank account. That’s how they cover their tracks. If you don’t have someone else to do it, then this is an easy function to outsource.

3. Close the Prior Accounting Periods

QuickBooks now has a way to lock down the prior periods. Once you produce a financial statement, that period should be “closed”. As a result, this reduces the risk of hiding a fraudulent transaction in a prior year.

4. Attach Scanned Images to Each Accounting Transaction

Most fraud occurs from check tampering. For example, the bookkeeper changes the payee to themselves. Prevent accounting fraud by scanning the bill and linking it to each accounting transaction inside QuickBooks. Thus, this makes it harder to fake a bill.

5. Set Up Username for Each User

QuickBooks now has an audit trail report which can never be turned off; however, if your staff login as “Administrator,” then you have no idea who made what entry. Set up a username for each user that way you can track who did what and when.

6. Restrict User Access

QuickBooks Enterprise Solutions has the ability to restrict access per user per screen. Make sure you have separation of duties between authorization, record keeping, and custodial responsibilities for each accounting transaction.

No system of internal control should be built on trust. The best accounting practice is to separate out the following functions: authorization, record keeping, and custodial responsibility for assets in each accounting transaction.

The CEO's Guide to Reducing Fraud


Originally posted by Jim Wilkinson on July 23, 2013. 

accounting fraud prevention using quickbooks, accounting fraud prevention

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Bank Reconciliation

See Also:
How to manage your banking relationship.
Which Bank to Choose?
Is It Time To Find A New Bank?
5 C’s of Credit (5 C’s of Banking)

Bank Reconciliation Definition

The bank reconciliation definition is the settlement of records between the balance per company financials and the balance per the bank statement. The process of accounting bank statement reconciliation is essential because of the many timing differences and errors in the recording process between two parties. When effectively implemented it assures that the bank as well as the business have relevant financial statements.

Bank Reconciliation Meaning

Bank reconciliation means reconciling financial statements which are owned by both the business itself and the bank statement. Without bringing these 2 records together the process of bank reconciliations would not bring value. From here each account is checked with records to assure a purchase date, income or expenditure, notes or additional needs, and more. This part, specifically, is where many differences arise. The cause of these may include bank deposit and work hours, policies and procedures for both entities, and more. Due to the different record keeping methodologies an alignment must be made to assure that each party has an operable understanding of the financial state of the company.

Bank reconciliation methods and procedures are focused on attaining adjusted cash balances which can be assembled into statements for both the bank and the associated business.

To avoid fraud while performing cash reconciliation, delegate this task to an employee who has no other connection with company cash.


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Bank Reconciliation Method

To begin the bank reconciliation method, enter bank and company balance on a schedule. This will create the initial foundation for the process to proceed. It is important to include the previous bank reconciliation form, if any, to establish differences between current records and this. Once completed, the process moves on to find differences in the accounts of the current period.

Next, look for deposits in transit – any deposits not yet included in the bank forms. These are deposits recorded by the company which are not yet in the bank records. Compare the bank statement deposits with the business’ internal deposit register. Add these to bank statements to form two equal records: one for the bank and one for the firm itself.

Then, find outstanding checks – any checks issues but not yet paid. These are checks written by the company which have not yet been fulfilled by the bank. Compare bank statement listings for paid checks with checks issued by the business under the cash payments journal. Deduct these from the bank records.

Now, find any errors. An example of one such error would be a returned check recorded as $50 but is actually in the amount of $60. Bank errors, when corrected, effect the adjusted balance of company records. The inverse is the case for company errors.

Finally, compile any final changes. These can include fees, interest, and other additional notes.

Complete the bank reconciliation format in this order to cover all important issues. A solid policy must be in place for bank reconciliation statements to be useful.

Bank Reconciliation Example

For example, Minnie is the CFO for Debt Collect LLC, a privately held debt collections company. Debt Collect is in good financial condition and regularly keeps up with their accounting work. Today, Minnie’s task is to review the bank reconciliation process.

Collecting Information

Minnie begins by collecting the relevant information. She sends a memo to all company accountants instructing them to make any final changes which effect overall company financial statements. After some time, she has all of her necessary records.

Performing the Reconciliation

Minnie then sets down to perform her reconciliation. She enters both bank and company balances on a schedule. She also compares this with her previous reconciliation form.

Minnie notices deposits are not at the same level. She quickly corrected this when she accounts for deposits in transit. Finally, she has reconciled the forms, and she moves on.

Minnie then accounts for outstanding checks. Upon examination, her work reveals a major problem. Her cash payments journal is much higher than that of the bank. She looks further to discover a very high level of bounced checks. Further research shows that debt holders, convinced by company contact, are sending checks. The problem is that they are not sending fulfillable checks. After looking at company policy, she prepares some procedure changes which should prevent the company from sending non-collectible checks.

Minnie completes her bank rec with no additional problems. She is satisfied by her analysis because it yielded results that will show her to be one of the great minds of the company. She looks forward to presenting her ideas to the board of directors and helping her employer.

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bank reconciliation, Bank Reconciliation Meaning, Bank Reconciliation Definition, Bank Reconciliation Method

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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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