The news is filled with stories about the financial woes of major corporations. Companies have filed bankruptcy while top managers insist they have no knowledge of how it happened. A business can fail for many reasons; few of them should be a surprise. The real root of this problem is bad accounting. A properly reconciled set of accounting records always provides an accurate picture of a company’s financial stability.
An accounting general ledger is a collection of all asset, liability, equity, income and expense categories for a business. Every accounting transaction is posted to a general ledger account. In accounting, the term “reconcile” refers to the comparison of general ledger account balances to another source in order to ensure that the financial information is properly reported. For example, the general ledger account for a checking account is reconciled to the bank statement for that account.
Accountants reconcile general ledger accounts when all transactions for the month have been posted in the accounting software. Once the accounts are reconciled, and the accountants are satisfied that all the transactions are properly classified and accounted for, the accountant will close the books for the month. Closing the books prevents changes to reconciled information. Year-end reconciliations are the most critical because the year-end accounting information is used to prepare the company’s income taxes.
Reconciliation of general ledger accounts is crucial for producing accurate financial statements such as the income statement, balance sheet and statement of cash flow. Mistakes are easily made when posting transactions to an accounting system. Reconciling all transactions creates confidence in the amounts reflected on the financial statements. Reconciliation also provides a way for the accountant to discover mistakes and change business processes to help avoid mistakes.
According to Entrepreneur, a proper division of employee duties is an important component in safeguarding the integrity of accounting information. Reconciliations should always be reviewed and approved by someone other than the employee who prepared them. Everything from honest mistakes to employee embezzlement can go undetected without a proper review.
Reconciliations should focus on balance sheet accounts. If all asset, liability and equity accounts are in balance, then net income is correct. Net income is the total of all income reported less all expenses. Transactions posted to income statement accounts might require reclassification to record them to the proper income or expense, but reclassification will not change the net income figure.