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.
A subsidiary is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or wholly controls the activities and policies of the daughter corporation.
Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.
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.
After reading this article the learner should be able to understand the meaning of intercompany and different types of intercompany transactions that can occur. Understand why intercompany transactions are addressed when preparing consolidated financial statements, differentiate between upstream and downstream intercompany transactions, and understand the concept of intercompany reconciliations.
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.
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. Understand the concept of the subsidiary ledgers and control accounts.
GL - Understanding Chart of Accounts
A chart of accounts (COA) is a list of the accounts used by a business entity to record and categorize financial transactions. COA has transitioned from the legacy accounts, capturing just the natural account, to modern-day multidimensional COA structures capturing all accounting dimensions pertaining to underlying data enabling a granular level of reporting. Learn more about the role of COA in modern accounting systems.
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.
Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.
In this article we will help you understand the double-entry accounting system and state the accounting equation and define each element of the equation. Then we will describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.
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