Marc's Insights- March 2018 Newsletter

To Balance, or Not to Balance, is not really a question…

Let’s start with a pop quiz question.

How often should you balance/reconcile the GL to subsidiary ledgers?

  1. Never
  2. Occasionally
  3. Just before annual audit
  4. Monthly

 

We all know the answer.  And yes, there is only one right answer.

Do a Google search on “reconciling the GL” and like with any Google search you will get thousands of hits.  But this one was toward the top of the list: “Reconciling the balances in the Accounts Receivable module with AR accounts in General Ledger is an important step and should be done as part of the month-end closing process. If a monthly reconciliation is done, the proper documentation will be available if an audit is performed, and any differences that exist between the two modules can be caught and corrected before the period is closed.”  That one is from Microsoft.  I underlined what I feel are two key points in that statement.

Before I continue, let’s try to define the difference between “reconciling” and “balancing”.  One definition doing another Google search said this: “Reconciliation is an accounting process that uses two sets of records to ensure figures are correct and in agreement. It confirms whether the money leaving an account matches the amount that's been spent, ensuring the two are balanced at the end of the recording period.”

My definition of reconciling as it relates to the GL is that it is a process to prove that the details of a subsidiary ledger match the GL control account.  An example would be accounts payable.  During the month new invoices cause the payable account to be credited, and invoices that are paid result in a debit to the payable account.  In the accounts payable subsidiary ledger at the end of the month there will be a number of invoices that add up to the unpaid amount.  That amount should match the control account in GL.  The process to determine if they match is what I would call reconciliation.  To me, and it’s just my opinion, balancing is more the outcome of the reconciliation process, and in an ideal world the AP subsidiary ledger would match, or balance to, the control account in GL.  So, you can be out of balance at the end of the month, but still have performed a valid reconciliation process.  Any difference though should be identifiable and documented.  Reasons for being out of balance can vary, but it is often either a timing difference or something was entered incorrectly.

Another example would be bank reconciliation.  You might be “out of balance” by $50.  Reason could be a deposit that you recorded on the last day of the month, but it hasn’t cleared the bank yet.  So technically it’s not in balance, but the reason is known and explainable.  So, you’ve done the reconciliation process and can explain why you aren’t “in balance”. 

When using a software system, shouldn’t everything automatically stay in balance? This may be a common thought, but it is not correct.  The reconciliation process is just as important when using a software system as it would be if you were using pen and paper ledger books.  The GL and its subsidiary ledgers should stay in balance, but as stated above there can be timing issues, data entry issues, and other reasons for being out of balance.

So what GL accounts should be reconciled?  A strict interpretation would say an account reconciliation is usually done for all asset, liability, and equity accounts, since their account balances may continue for many years.  Some of the more common accounts would be accounts payable, accounts receivable, inventory, assets, payroll leave balances, etc.

Another reason you should reconcile/balance on a monthly basis is to provide accurate financial statements.  The board and manager(s) are relying on the monthly financial statements to make decisions.  Using GL accounts overstated or understated to make decisions could generate negative impacts.

In conclusion, PCS strongly recommends that you reconcile your subsidiary ledgers to their GL control accounts on a monthly basis.  That may sound like a lot of work, but if you have a plan and a method and apply it consistently every month, it will not take long.  And the advantage is if you do find a problem, you only have to look through the last month to find it.  If you only balance once a year, you have 12 months to dig through to try to find the problem.  And that certainly is not quick or easy.  And if you call us at PCS and say “I’m out of balance” one of the questions we will ask you is “when were you last in balance?”  You’ll get a gold star if you say last month.  If you say “I’m not sure” or “a year ago” we might make you go sit in time-out while we try to help you figure out the reason. Ok, getting a little dizzy up here on this soapbox, so I’ll call it a wrap.  Moral of the story: reconcile monthly.