Complexities in GL System
Although technically a general ledger appears to be fairly simple compared to other processes, in large organizations, the general ledger has to provide many functionalities and it becomes considerably large and complex. Modern business organizations are complex, run multiple products and service lines, leveraging a large number of registered legal entities, and have varied reporting needs.
These complexities create a need for advanced general ledger systems providing new functionalities. Let us understand some drivers for this complexity.
1. Specialized Software
For large organizations, the general ledger is hosted on a computerized system, integrated with multiple sub-ledgers and the legacy general ledgers. For the most part the journal entry is automated and fed into the general ledger through a complex import process. GL is the backbone of any enterprise resource planning (ERP) software and the general ledger stores the transactions into a database that is shared with other processes being managed through the ERP. In such cases a GL provides the following information:
- General ledger chart of accounts
- Administration of general ledger database reporting/consolidation structure
- Preparation and recording of journal entries
- Monitoring of the close process at unit and company levels
- Review and analysis of account and unit-level trial balances
- Preparation of consolidated company trial balance
- Generation and distribution of monthly system financial reports
- Reconciliation of balance sheet accounts and related bank statements
- Preparation of eliminating entries
- Finalization of monthly consolidated statements
- Calculation and consolidation of expense type (selling, general and administrative/cost of sales) information
- Maintenance of corporate/group overhead allocation pools and related rates
- Manual record retention/archiving and audit support specific to general accounting.
2. Multitude of Subsidiary Ledgers
For any company that has a large number of transactions, putting all the details in the general ledger is not feasible. Hence it needs to be supported by one or more subsidiary ledgers that provide details for accounts in the general ledger. Consider any one account in a general ledger, such as Accounts Payable. Perhaps you want to know how much money you currently owe to each of your suppliers and this information is very critical for you to manage your relationship with that supplier and to ensure that you are paying only for what you purchased and received. If you only have one or two suppliers, it is easily possible to compile this information directly in the general ledger by opening two natural accounts in the name of the suppliers. But what if you have hundreds or even thousands of suppliers? In that case, you may want to create subsidiary ledgers for accounts payable that will capture the complete master and transactional level details for each of your suppliers. This way, you can record the details of transactions involving each supplier in the relevant subsidiary ledger and then subsequently transfer the totals into a control account in the general ledger.
3. Complex Organizational Structure
Modern business organizations run multiple products and service lines, operate globally, leverage a large number of registered legal entities, and operate through complex matrix relationships. To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders. These complexities create a need for advanced operational and supporting business processes to drive organization-wide effectiveness, efficiency, and achieve business objectives. This forces companies to create a diverse array of subsidiaries, legal entities, organizations, and accounting processes to ensure a smooth and profitable business flow. Tax considerations also impact how businesses construct these complex legal structures. General Ledger has to be structured in a fashion that it can cater to the reporting needs of every unit, department, and regulatory bodies in this complex structure.
It needs to collect and process data from these multiple units and provide a consolidated view of the enterprise for shareholders and management.
4. Legacy Systems
Mergers & Acquisitions (M&A) is the new normal for large companies, driving innovation and growth. The capability to successfully integrate or divest businesses is a major source of competitive advantage. There is a lack of flexibility to integrate mergers and acquisitions. All these corporate actions bring added complexity from a general ledger standpoint. Legacy data need to be transferred to the organizational chart of accounts system and accounting policies. Systems need to be established to collect and transform such data on an ongoing basis until the migration to the enterprise general ledger is done.
5. Multiple Charts of Accounts
In these large corporations, different business units within the company have different COAs and different reporting priorities and the standard reports don’t produce the information the organization needs to properly run the business or meet tax and/or regulatory needs. Complexity arises also because of accounts that are not used consistently across the organization, reducing the effectiveness of reporting and consolidation.
6. FX and Complex Currency Requirements
For international businesses with significant volumes of cross-border transactions, the management of currency risk is an essential task for the treasury department. There are businesses with varied and very complex FX management needs, either because they have higher transaction volumes or because they work with a larger number of currencies. In these cases, their General Ledger becomes very complex as it needs to manage various processes like multi-currency recording, translation, conversion, and revaluation. Some businesses also do FX leveling and sweep to manage the hedging risks.
7. Changing Regulatory Landscape
The global regulatory landscape is undergoing a fundamental change. In the years since the 2007/08 financial crisis, regulators across the globe have focused on a program of more robust supervision of financial services firms. The increasing weight of new regulatory legislation from regulators, coupled with the increasingly diverse risks to which firms are exposed, means that firms need to ensure that their general ledgers are updated and flexible enough to provide the data needed for these changing participants are required to adapt and evolve to address the regulatory and technological changes.
Related Links
You May Also Like
-
General Ledger - Advanced Features
Modern automated general ledger systems provide detailed and powerful support for financial reporting and budgeting and can report against multiple legal entities from the single system. These systems offer many advanced functionalities right from journal capture to advanced reporting. This article will provide an overview of some advanced features available in today's General Ledgers.
-
Multi Currency - Functional & Foriegn
Currency is the generally accepted form of money that is issued by a government and circulated within an economy. Accountants use different terms in the context of currency such as functional currency, accounting currency, foreign currency, and transactional currency. Are they the same or different and why we have so many terms? Read this article to learn currency concepts.
-
An account inquiry is a review of any type of financial account, whether it be a depository account or a credit account. In this tutorial, you learn what we mean by drill through functionality in the context of the general ledger system. We will explain the concept of drill-down and how it enables users to perform account and transaction inquiry at a granular level and the benefits of using this functionality.
-
In some of the ERP tools, there are more than 12 accounting periods in a financial year. This article discusses the concept of accounting calendar and accounting periods. Learn why different companies have different accounting periods. Understand some of the commonly used periods across different organizations and the definition & use of an adjustment period.
-
Multitude of these legal and operational structures clubbed with accounting and reporting needs give rise to many reporting dimensions at which the organization may want to track or report its operational metrics and financial results. This is where business dimensions play a vital role.
-
Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.
-
Functional Organizational Structures
A functional organizational structure is a structure that consists of activities such as coordination, supervision and task allocation. The organizational structure determines how the organization performs or operates. The term organizational structure refers to how the people in an organization are grouped and to whom they report.
-
The sole trader organization (also called proprietorship) is the oldest form of organization and the most common form of organization for small businesses even today. In a proprietorship the enterprise is owned and controlled only by one person. This form is one of the most popular forms because of the advantages it offers. It is the simplest and easiest to form.
-
As the business grows, the company may want to transition to a branch structure as branches are allowed to conduct a much broader range of activity than representative offices. Branches can buy and sell goods, sign contracts, build things, render services, and generally everything that a regular business can do. A company expands its business by opening up its branch offices in various parts of the country as well as in other countries.
-
Introduction to Organizational Structures
Organizations are systems of some interacting components. Levitt (1965) sets out a basic framework for understanding organizations. This framework emphasizes four major internal components such as: task, people, technology, and structure. The task of the organization is its mission, purpose or goal for existence. The people are the human resources of the organization.
