Your loan system says the portfolio is KES 661,665.37. Your trial balance says the loans receivable account is something else. Both numbers were produced by careful people. Here are the six reasons they differ, in the order they are usually responsible, and what each one looks like when you go looking for it.
The structural cause
In most lenders, the loan book and the general ledger are two records of the same events, maintained by two different processes. The loan officer applies a repayment; the accountant posts a journal. Even when both are done correctly, they are done at different times by different people from different source documents, and anything that touches one but not the other opens a gap.
The structural fix is to make the ledger a consequence of the loan event rather than a parallel record of it: the repayment and its journal are written in the same database transaction, so either both happened or neither did. Everything below is what still needs attention once that is true.
1. Accrued interest that was never posted
This is the biggest one, and it is usually not an error — it is a policy difference nobody wrote down.
The loan module typically shows the borrower's total outstanding: principal plus interest that has accrued but is not yet due. The ledger, if it posts interest income only when a payment is received, shows principal alone. Both are defensible; they are answers to different questions. The problem is when the two are compared as though they answer the same one.
How to spot it: the difference is roughly one period's interest across the performing book, and it grows and shrinks with the book rather than drifting steadily upward.
What to do: decide explicitly whether you accrue interest to the ledger or recognise it on receipt, write the decision down, and make sure the portfolio report you compare against uses the same basis. If you accrue, you also need a suspension rule for non-performing loans — accruing income on a loan that has not been paid in six months inflates both sides of your balance sheet.
2. Penalties charged in the loan module and nowhere else
Penalty accrual is very often a scheduled job in the loan system that adds a charge to the borrower's balance. Whether it posts a journal is a separate question, and the answer is frequently no.
How to spot it: the gap grows on the same day each month, and the size of the jump correlates with your arrears rather than with your disbursements.
What to do: either post penalties to a penalty income account as they accrue, or do not add them to the borrower's balance until they are charged. Half-doing it is the only option that guarantees the numbers disagree. Note also that penalty income accrued on a loan that will never pay is income you will reverse later; many lenders recognise it on receipt for exactly that reason.
3. Write-offs done in one place
A loan written off in the loan module disappears from the portfolio report immediately. If the ledger entry — debit the provision or the write-off expense, credit loans receivable — was not posted, the ledger still carries it.
How to spot it: a step change on a single date, matching one or a small number of loans exactly.
What to do: make write-off an operation that cannot complete without its journal. It should also be a permissioned action separate from ordinary loan editing — writing off a loan is the cheapest way for an insider to make a stolen repayment disappear, which is why it belongs behind maker-checker.
4. Suspense: money received, loan not yet credited
An M-PESA payment that could not be matched to a loan is cash you have received. Handled properly it debits the bank and credits a suspense liability, and the loan book correctly does not move. That is not an error — but it is a difference, and if you do not know your suspense balance you cannot explain it.
How to spot it: the gap is exactly your suspense account balance. That is the good case; it means everything is working and somebody just needs to clear the list.
What to do: report the suspense balance next to the reconciliation, every time, so it stops being a mystery and becomes a work queue. See how M-PESA paybill reconciliation actually works.
5. Reversals recorded as deletions
Somebody applied a payment to the wrong loan and fixed it by deleting the payment. The loan book is now right. The ledger — if the original journal was not reversed — is wrong, and worse, there is no record that anything happened.
How to spot it: the hardest of the six, because a deletion leaves no trace by definition. You find it by discovering that the audit log has a gap, or you find it in an audit.
What to do: nothing financial is ever hard-deleted. A mistake is corrected by a contra entry that references the original, and both remain visible. This is inconvenient exactly once — the first time someone has to explain a reversal to a customer — and it is what makes the ledger evidentiary rather than decorative.
6. Timing, and the cut-off nobody agreed
The portfolio report was run at 09:00 on the 1st. The ledger was closed at 18:00 on the 31st. Between those two moments, four repayments arrived and two loans were disbursed.
How to spot it: the difference is small, changes every month, and disappears if you re-run one of the two reports at the other's timestamp.
What to do: reconcile as at a stated instant, and make both reports capable of being run "as at" a date and time rather than only as of now. A portfolio report that can only show today's position cannot be reconciled to a period-end ledger at all.
A monthly procedure that takes twenty minutes
- Run the portfolio report as at the period end. Note principal outstanding, interest accrued and penalties accrued separately. One combined number cannot be reconciled.
- Run the trial balance for the same instant. Take loans receivable, interest receivable if you accrue, and the suspense account.
- Compare principal to loans receivable first, on its own. This should agree exactly. If it does not, the cause is in items 3, 5 or 6 above.
- Add accrued interest and penalties only if your policy is to accrue them, and compare to the matching receivable accounts.
- Note the suspense balance as a reconciling item rather than trying to make it vanish.
- Write down every reconciling item with its cause. A reconciliation that ends in "difference: 4,318.22" and no explanation is not a reconciliation.
Related: PAR, OLB and collection rate, which are all computed from the loan book and are all wrong if it does not agree with the ledger.