Too often, I see clients where general ledger account reconciliations are not prepared in a timely fashion or are not appropriately completed. On many occasions where account reconciliations are not prepared timely, there are old or stale items that should have been removed from the general ledger account at an earlier timeframe. Here are a few best practices when preparing and reviewing account reconciliations.
- It is best to prepare account reconciliations for all balance sheet accounts on a monthly basis. Don’t wait until the end of each year to reconcile an account. There is a good chance that you may have activity from earlier in the year that will need investigation to determine if it should still be housed in the related general ledger account. Timely identifying any reconciling items makes it easier to determine what adjustment may be needed with the reconciling item.
- The timing of reconciliation completion can be based upon the amount of activity running through an account. For accounts with a substantial amount of activity running through it, monthly account reconciliations are recommended. For those with less activity, you may decide to prepare account reconciliation less frequently. I recommend no longer than quarterly.
- Account reconciliations should never be a regurgitation of the general ledger activity. I see this quite often. The reconciliation should include a separate schedule outlining the components of a general ledger account. For accounts receivable and accounts payable, this will simply be the aged trial balance for each. However, for accrual accounts, especially a miscellaneous accrual account, and prepaid expenses and other assets, separate manual detail will need to be maintained. The totals of the separate detail should be reconciled to the general ledger and any differences should be identified.
- For any reconciling items, be sure to identify when the reconciling item will clear. For certain items such as detail of prepaid expenses, deposits or other assets, be sure the supporting schedule for the balance identifies the amortization period, rate of amortization, or date that originally recorded item is expected to clear from the account. This will assist with monitoring the activity in the account to ensure items clear out in a timely manner.
- Account reconciliations should be reviewed. The reviewer will ensure that the reconciliation is appropriately prepared and any reconciling items timely clear as expected.
In summary, employment of these best practices will help ensure that your general ledger accounts are appropriately reconciled to their subsidiary’s ledgers. All companies, whether large or small, should make account reconciliations part of its policies and procedures to ensure that the company’s financial position and operations are appropriately stated throughout the year.
Jonathan M. Poppel, CPA