This procedure proves that the beginning sub-ledger balance (total of all open invoices) plus the net accounts payable activity (transaction totals) for the day equals the ending sub-ledger balance for the day. This process is referred to as balancing the sub-ledger. The balancing process can be performed at the end of each day once all activity for the day has been processed, or during the following morning, if the proper reports are run at the end of each day. To balance the sub-ledger you should perform the following steps.
Make sure that no accounts payable activity is being processed for the date being balanced. This will not be an issue if you are balancing to reports run at the end of the prior day.
Produce a valid ending sub-ledger report. The Open Accounts Payable or the Accounts Payable Aging report can be used for this purpose. The AP sub-ledger (individual open invoice totals) are adjusted as transactions are processed. The ending sub-ledger report is a point in time report (a snapshot of the invoices at that point in time). The ending sub-ledger report must include all activity through the end of the day being balanced and no activity after that date. A valid report can only be produced if it is run at the proper time. This is normally accomplished by running the report after hours as part of the nighttime process. The report can be processed automatically by the system at night and the system date can be changed to ensure that the next days transactions will be posted using the proper date. This produces a report with a valid cutoff.
Verify that the sub-ledger was in balance at the end of the prior day. The only way to prove that the beginning balance being used during this procedure is valid is to have already balanced the sub ledger for the prior days activity. This proves that the sub ledger beginning balance has a valid cutoff (that it includes all activity thru the end of the prior days processing and no activity from the current days processing). If the prior days activity is not in balance, then you must either balance it first (discover and resolve the cause), or balance the activity for the entire period since the last time that the sub ledger was proven to be in balance.
Run the Accounts Payable Journal report for the date being balanced and review it. This report lists all of the transactions (journal entry lines) posted to the accounts payable control account in the general ledger. Accounts Payable Transactions which affect the sub-ledger balance and cause journal entry activity in the accounts payable control account include: AP invoice and credit memo entry, manual payment transactions, computer generated check transactions, credit memo application, and check void transactions. The AP Account Journal report includes all of these transactions by default. The report also performs an audit of each transaction during processing. The report checks the invoice associated with each journal entry line on the report to make sure the sub-ledger activity (change in invoice balance) equals the journal entry activity for the invoice that is recorded in the AP Control file in the GL (transaction totals). The report will list any errors found during the audit. If any errors appear on the report they indicate that the sub-ledger is not in balance and you should immediately notify your system administrator so that the errors can be corrected.
Add the net total from the accounts payable journal to the beginning sub ledger balance. Compare it to the ending sub-ledger balance. They should match. If the totals are in agreement, file the reports (or archive the files and store the daily reconciliation worksheet for future use).
Daily Accounts Payable Sub-ledger Reconciliation
The following is an example of the worksheet that should be completed on a daily basis to verify that this procedure has been successfully completed.
(1) Beginning Sub-ledger balance - 7/1/2003 $ 1,000,000.00
(2) AP Journal(s) 7/2/03 thru 7/2/03 $ 502,500.00
Subtotal $ 1,502,500.00
Ending sub-ledger balance 7/2/03 $1,502,500.00
(1) This should be a verified beginning balance and should be printed in detail and preferably to file so that the file can be searched if any problems are discovered during the balancing procedure.
(2) This report should be run with default selections which include AP,AA,CD,MD,RV transactions. A report must be run separately for each division in which AP activity is processed as the control account used by report is based on the division. The report(s) should not show any payment errors. If the reports do show errors they should be corrected before attempting to balance the sub-ledger.
If the beginning sub-ledger balance and the net activity for the period do not agree with the ending sub-ledger balance, then the sub-ledger and journal entry activity for one or more invoices is not equal and the invoices and the journal entries associated with them should be identified and corrected as necessary. The following procedures should be performed in order to identify the transactions or invoices causing the problem.
Run the Accounts Payable Entry Register for the period. This report runs through the AP Register records entered during the selected date range and audits the change in each invoice balance (sub-ledger) against the journal entries (transactions) posted against each invoice. The report will list any errors found during the audit and if errors are found, the report will print all transactions (journal entry lines) posted against the invoice showing the error. If any errors appear on the report they indicate that the sub-ledger is not in balance and you should immediately notify your system administrator so that the errors can be corrected. You will not be able to balance the sub ledger until this report can be rerun with no errors.
Recheck the AP Account Journal report for errors and correct them if any are listed on the report. You will not be able to balance the sub-ledger until this report can be rerun with no errors. It performs the Journal Entry to AP Register file audit and will detect changes made to the transaction detail in the Journal Entry file that did not update invoice balances correctly in the Register file.
If no errors appear on the AP Register or the AP Account Journal and the sub ledger is still not in balance, this indicates that journal entries exist for all changes made to invoice balances and that all changes made to invoices balances are recorded in the journal entry file. The cause of the out of balance condition is therefore one of the following.
The prior period ending sub ledger balance was not in balance at the start of the current period. In this case, you need to correct the prior period before trying to balance the current period. If this cannot be done, you must balance the entire period since the sub-ledger was last proven to be in balance.
A transaction was processed during the current period but was saved with an invalid date (given a date outside the current period) due to a problem with the system date or another reason. In this case, a transaction may have been properly posted (both invoice activity and journal entry activity for the invoice are properly posted), but either the invoice or the journal entry or both are assigned a date outside of range being audited. This will cause a problem as the invoice will show up on the ending AP Aging or Open AP report being used to balance to, but the journal entries (transactions) written when the invoice was created will not be listed on the AP Entry Register and or the AP Account Journal reports being used to balance to (due to the fact that the transactions are dated outside the date range being selected). If this problem occurs, you can find the error by
Reviewing the transactions for the period using a journal entry number or AP Register number range selection and look for transactions which are dated out of sequence. For example a transaction with a current journal entry number but a prior period entered date.
Rechecking that the prior periods are in balance. Normally this error will throw prior periods out of balance due to fact that the transaction is written to prior period and invoice was not on the prior period ending report. You can use the reproducible reports such as the AP Account Journal and Entry Register to recheck the transaction totals for dates prior to the range being balanced and see if they have been changed.
Data Loss. If a hardware failure occurs and transaction or invoice records are lost, then the sub-ledger will go out of balance. If this unfortunate event occurs, then the audit routines can be used to help identify the missing data. The Journal Entry to Invoice audit routine (AP Account Journal) can identify missing invoices and the Invoice to Journal Entry routine (AP Entry Register) can identify missing journal entries. If data is lost simultaneously in both files ( a rare occasion since it requires that the invoice and all journal entries for it to control account are lost) then neither of these audit routines will find the problem and the only way to identify the missing data is to compare the beginning and ending reports and prove the changes made to each invoice listed on the reports using the transactions which are still in the system and the whatever other information which is available to reconstruct the data (check copies, invoice documents, etc). You can also check for missing journal entry numbers in the journal entry file.