How to reconcile the general ledger

A trial balance proves the ledger is arithmetically in balance. It can't show that the bank balance is the real bank balance, or that accounts payable holds every unpaid bill. A general ledger reconciliation takes each account in turn and asks what evidence supports its balance.

business.gov.au's glossary describes a balance sheet as a snapshot of a business at a particular date, listing its assets and liabilities. The reconciliation is how you check that snapshot, so it is done at each date you prepare a balance sheet for, usually each month end and always at 30 June, the end of the Australian financial year.

Balance sheet accounts carry their balances forward from one period to the next, so an error left in one stays there until someone finds it. Each of them can be backed by something: a statement, a count, a list or a schedule.

Income and expense accounts start again each financial year. Read each one against the same period last year and against what you expect, since a cost posted to the wrong expense account leaves every balance sheet account looking right.

List every balance sheet account with a balance, the evidence that supports it, and what is left over.

Every line ends in a status. Most agree once their own reconciliation is done. The rest name what makes up the difference and who is following it up, and they reappear on next month's schedule until they are cleared.

Some ledger accounts summarise a more detailed list kept elsewhere. Accounts receivable should equal the total of customers' unpaid invoices, accounts payable the total of unpaid supplier bills, and inventory, under perpetual tracking, the total value of the stock records. business.gov.au's glossary treats accounts payable and accounts receivable as records of short-term amounts, under 12 months, owed by and to the business.

When a control account and its list disagree, check for entries posted directly to the control account without the corresponding customer, supplier or stock-item detail. Those entries can change the ledger without changing the detailed records.

Suspense accounts hold items that couldn't be coded when they arrived, such as an unidentified deposit. Clearing accounts hold amounts on their way from one place to another, such as card takings on their way to the bank. A suspense account should be empty at a period end. A clearing account should hold only amounts still in transit at that date, such as a card settlement the provider hasn't yet paid in.

• List every item making up the balance.
• Find out what each one is and move it to the right account, with a description saying what it was.
• Keep anything still unknown on the list with the name of whoever is following it up.

List the manual journals posted in the period and check that each has a description, supporting evidence and a reason that still holds. The Corporations Act's definition of a company's financial records takes in documents of prime entry and the papers explaining adjustments.

• Opening balances for the new year should equal last year's closing balances after any adjustments your accountant made. A difference usually means a late change to the old year, an adjustment not yet posted, or an entry dated in the wrong year.
• For a sole trader or partnership, check the owner's contributions and drawings against the records of money put in and taken out, such as bank and card statements and cash-up sheets. business.gov.au's glossary treats drawings as personal costs met from a business account; which owner's accounts your structure needs is a question for your accountant.
• Equity as a whole should equal assets less liabilities, the way business.gov.au's glossary calculates it, once the year's profit or loss is included.

Date the schedule, note who prepared it and who checked it, and file it with the supporting reconciliations. Carry every open item to the next period's schedule. business.gov.au says most business records need keeping for 5 years, and that company records need keeping for 7 years.