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.
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:
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.
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.
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.
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.
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.
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.
Defining Organizational Hierarchies
A hierarchy is an ordered series of related objects. You can relate hierarchy with “pyramid” - where each step of the pyramid is subordinate to the one above it. One can use drill up or down to perform multi-dimensional analysis with a hierarchy. Multi-dimensional analysis uses dimension objects organized in a meaningful order and allows users to observe data from various viewpoints.
Network Organizational Structures
The newest, and most divergent, team structure is commonly known as a Network Structure (also called "lean" structure) has central, core functions that operate the strategic business. It outsources or subcontracts non-core functions. When an organization needs to control other organizations or agencies whose participation is essential to the success, a network structure is organized.
An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.
GL - Unearned / Deferred Revenue
Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.
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What Is a General Ledger? General Ledger (also known in accounting as the GL or the Nominal Ledger) is at the heart of any accounting system. A general ledger is the master set of accounts that summarize all transactions occurring within an entity. Ledger is the skillful grouping and presentation of the Journal entries. Learn the accounting fundamentals, general ledger process, and general ledger flow.
In this article, we explain some commonly used subsidiary ledgers like accounts receivable subsidiary ledger, accounts payable subsidiary ledger or creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger, and cash receipts or payments subsidiary ledger.
GL - Journal Posting and Balances
In this tutorial, we will explain what we mean by the posting process and what are the major differences between the posting process in the manual accounting system compared to the automated accounting systems and ERPs. This article also explains how posting also happens in subsidiary ledgers and subsequently that information is again posted to the general ledger.
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