How to prepare general ledger to sub-ledger reconciliation

September 9, 2009

General ledger to sub-ledger reconciliation type with step by step instructions.

1. Nature of general ledger to sub-ledger account reconciliation

In another article about reconciliations (see "Bank Account Reconciliation"), we reviewed in detail the purposes of accounting reconciliation statements, identified two major types of reconciliations (bank reconciliation and general ledger to sub-ledger reconciliation), provided step-by-step instructions for the bank reconciliation process, and showed a real life example of the bank reconciliation. In this article, we continue explaining the reconciliation process and switch our gears to the general ledger to sub-ledger reconciliation.

1. Step by step instructions for general ledger to sub-ledger reconciliation

Reconciliation of the general ledger to sub-ledgers is another type we will review. The general ledger (or simply "ledger" or "G/L") is a collection of all balance sheet and income statement accounts. The general ledger also includes all journal entries posted to accounts. In nowadays' computerized world, the ledger is maintained in an electronic form.

A sub-ledger is a detailed record of transactions for an individual account. Usually, a sub-ledger contains detail of transactions for an account, which are summarized by day (or month) and the total is then posted to the general ledger. Therefore, sub-ledgers serve as support for amounts posted to the general ledger. Sub-ledgers are presented in an electronic form as well (e.g. Excel file, detail of an account in QuickBooks, SAP or Oracle). For example, accounts receivable sub-ledger may contain detail for all issued invoices and cash receipts. At the end of a day, an accountant can summarize all invoices issued (sales) and cash receipts (cash collections) and post them to the general ledger in two separate journal entries. The general ledger would not contain detail for each individual transaction.

As there is always room for a human error, it is important to reconcile the general ledger balances to the sub-ledger balances on a periodic basis to spot such errors. If there are no errors in posting journal entries to the general ledger, then the two balances will match; however, if there are differences, then there would be reconciling items, which need to be analyzed and corrected, if necessary. Two important accounts that should be reconciled on a monthly basis are accounts receivable and accounts payable.

Illustration 1: General ledger to sub-ledger reconciliation statement

Balance per general ledger:

 

Add / (Subtract) Items in general ledger not in sub-ledger:

 
 

Item a short description

 
 

Item b short description

 
 

 

Add / (Subtract) Items in sub-ledger not in general ledger:

 
 

Item c short description

 
 

Item d short description

 
 

 

Adjusted balance per general ledger

Y

   

Balance per sub-ledger

X

   

Difference between general ledger and sub-ledger

Z

   

Reconciling items (if any)

 

Reconciling item I short description

 

Reconciling item II short description

 

 

Total reconciling items (= Difference)

Z

Sometimes items (amounts) are included into a sub-ledger, but not in the ledger. Vice versa, items (amounts) may be posted to the ledger via a journal entry, but not recorded in the sub-ledger. Such items should be identified on the reconciliation separately to ensure they are given proper treatment.

Let's now take a look at a four step approach for an accounts receivable reconciliation and an accounts payable reconciliation.

Step 1: Compare G/L balance to the sub-ledger balance

You should start by analyzing the G/L and sub-ledger balances to identify any differences. While doing that, pay special attention to the transactions that are unusual in their nature. For instance, non-recurring transactions may have a higher risk of an error than transactions completed on recurring and regular basis. You should examine the sales journal (for receivables) and the purchases journal (for payables); have a look at posted entries, which were posted to the wrong account, transactions posted twice (duplication error), transposition errors, etc. Then you should look at the cash receipts and cash payments journals (for receivables and payables, respectively). Possibly, you will need to repeat with your examination of the invoice register for accounts receivable and the purchase order journal for accounts payable.

Step 2: Investigate reasons for the difference

After you have compared the G/L and sub-ledger and found differences, you should investigate reasons for them. Reasons for the difference can include the following:

  • Items posted to G/L, but not in sub-ledger
  • Items posted to sub-ledger, but not in G/L
  • Errors

Some of these items require adjustments to the G/L while others require adjustments to the sub-ledger. Illustration 2 shows where an adjustment is needed depending on the reasons for a difference.

Reasons for Difference

Example

Where to Adjust

Adding up error

The sales day book (or purchases day book) has been overstated / understated by wrong summarizing of totals

Adjust G/L

Omission

A debit / credit balance has been omitted from the list of customer / supplier account balances

Adjust sub-ledger

Duplication

A customer / supplier account balance of the same transaction has been posted twice by mistake

Adjust sub-ledger

Transposition

A sales / purchase invoice recorded in the individual account as $XY instead of $YX

Adjust sub-ledger

A total in the sale / purchase day book has been carried forward as $ACB instead of $ABC

Adjust G/L

Set-offs in individual accounts

A credit balance on the suppliers ledger has been set off against a customer's ledger debit balance

Adjust G/L

Step 3: Adjust G/L and/or sub-ledger

The next step is to make necessary adjustments to the G/L or to sub-ledger(s) based on the reconciliation to correct any errors, omissions, etc. To identify what needs to be adjusted, you could use the template of the general ledger to sub-ledger reconciliation statement presented above.

Step 4: Compare adjusted balances

Finally, compare G/L balance to sub-ledger balance again, after all necessary adjustments were made. If reconciling items are resolved, the reconciliation process is completed. If there is a difference, continue to examine the sub-ledger and journals that are a part of the revenue and expenditure cycles to identify the problem and correct it.

Not a member?
See why people join our
online accounting course:
Lecture Contents:
Free Study Notes
Download free accounting study notes by signing up for our free newsletter (example):
First Name:
E-mail:
We never share or sell your e-mail to third parties.