More Related Content
Similar to General Ledger Concepts (20)
More from www.technofunc.com (13)
General Ledger Concepts
- 4. 2.0 GENERAL LEDGER CONCEPTS 2012
© Chartered Technofunctional Institute Page 3
10. Allocations.
11. Intercompany.
12. Trial Balance.
This tutorial is intended to give those of you who are not familiar with the operation of a general ledger,
basic knowledge about its operation and functionalities, as well as some explanation of commonly used
accounting concepts. We have purposefully abstained from the basic double‐entry book keeping
concepts in this tutorial and will focus on key functionalities expected out of any automated general
ledger system.
This tutorial focuses on these concepts from the perspective of an I T professional who is expected to
work on any project involving design, build or interface to an automated GL system, rather than a
student of accounting.
At the end of this chapter, combined with the functional knowledge acquired in Chapter 1 on General
Ledger Fundamentals, you will acquire a basic understanding of GL Functionalities, GL Processes,
Understanding of Steps in GL Processes and what activities they do supplement with some important
concepts in GL and Accounting. We will close this chapter by making you understand what a trial
balance is and in the next chapter we will have a deep dive on some key accounts that make the
foundation of accounting as well as any General Ledger system. Any good technical or techno‐functional
consultant will be able to understand the major GL Setups of any automated accounting package after
this foundation. Our later chapters will enable you to acquire mastery in these concepts as we explain
each one of them in greater detail.
We hope that understanding these concepts in detail will help you truly understand the business
requirements and equip you with the necessary functional knowledge to build effective and sustainable
I T solutions.
Let’s move to next topic to understand Accounting Periods and Accounting Calendars.
- 6. 2.0 GENERAL LEDGER CONCEPTS 2012
© Chartered Technofunctional Institute Page 5
others 53. Fiscal years vary between businesses and countries. Fiscal year may also refer to the year
used for financial reporting or for Income Tax Reporting.
4–4–5 Calendar: It is another method of managing accounting periods. It is common calendar structure
for some industries, like retail, manufacturing and parking industry. 4–4–5 calendar divides a year into 4
quarters. Each quarter has 13 weeks which are grouped into two 4‐week "months" and one 5‐week
"month". The grouping of 13 weeks may be set up as 5–4–4 weeks or 4–5–4 weeks, but the 4–4–5 is the
most common arrangement. Its major advantages over a regular calendar is that the end date of the
period is always the same day of the week, which is useful for shift or manufacturing planning, and in
this calendar every period is the same length. Each accounting period for one business year corresponds
to the same accounting period in the previous year, and the next year. This helps in comparative analysis
and provides a review and forecast tool for management.
52–53‐Week Fiscal Calendar: It is a variation of the 4–4–5 calendar. It is used by companies that want
their fiscal year to end on the same day of the week. Any day of the week may be used as the ending
day, and use of Saturday and Sunday is common as this facilitates counting inventory and other year end
accounting activities due to business holiday. Some major drawbacks for non‐calendar periods are:
These calendars result in 364 days (13 periods X 4 weeks X 7 days per week) and there are 365
days in a year. This shortfall of 1 day each year needs adjustment.
Bank statements are usually done on a monthly basis and can make the bank reconciliations
process a little complicated.
Some expenses are billed on a monthly basis. You might need to make adjustments for these
types of expenses.
Transaction Calendar for Average Balancing: Some industries like banking needs to maintain their
average daily balances. They need to define their transaction calendars specifying each valid business
days for which the average balances needs to be calculated and maintained in General Ledger.
Calendar Adjustments: Large corporations conduct their businesses across the globe spanning multiple
countries. In some jurisdictions or countries, the accounting books needs to be maintained as per the
rules prescribed by the local laws of that country. Parent company being the owner of the subsidiary
units operating in different countries, need to consolidate its results for reporting in its base country of
registration. As the units, that are part of the same group of businesses, are not maintaining the same
fiscal year in their local books, consolidating company need to adjust for transactions between units
with different fiscal years. This adds complexity to consolidation processes and automated general
ledgers help manage these complicated adjustments.
E R P tools provide you with the flexibility to define more than 12 accounting periods in a financial year.
As a best practice companies using automated general ledgers define adjustment periods in their
accounting calendars. They put one accounting period as "Year Open" period to clear carried over
balances from last financial year and last period as "Year Close" where adjustment transactions are
made for the same financial year. These periods are generally known as “Adjustment Periods”. We will
discuss the concept of adjustment periods in detail in the next page.
- 10. 2.0 GENERAL LEDGER CONCEPTS 2012
© Chartered Technofunctional Institute Page 9
today but for delivery and payment on a specific future date. Historical Exchange Rate refers to the
exchange rate prevalent on the date of the original transaction.
What is Accounting Currency and Functional Currency?:
Accounting Currency is the monetary unit used while recording transactions in company's financial
books. “Accounting Currency” is also known as “Functional Currency” and is the main currency used by
a business entity. It is the monetary unit of account of the principal economic environment in which an
economic entity operates. This is the environment in which an entity primarily generates and expends
cash.
The accounting currency may not necessarily be same as the transacting currency. “Transacting
Currency” is the currency which customers see and deal with when conducting a transaction, such as a
sale. Companies are likely to use their home country's currency (Accounting Currency) when recording
transactions, even if the sale was denominated in some other currency (Foreign Currency)
For example, a US Company conducting business in India will most likely use “US Dollar(USD)” as the
accounting currency, even if sales transactions are conducted using the “Indian Rupee(INR)”. In this
scenario US Dollar is the accounting currency and Indian Rupee is the transacting currency.
For companies having operations in different countries across the globe, managing multiple currencies
could be a complicated task due to the interplay of foreign exchange rates and need to make
conversions from one currency to another. Whenever the business entities enter into transactions
(sales, payments, etc.) in multiple currencies, for the purposes of accounting, these items needs to be
converted into accounting currency (functional currency) at an appropriate exchange rate. Transactions
are often converted at the spot rate, i.e., the rate of exchange between the transacting currency and the
functional/accounting currency on the date of the transaction. Sometimes local laws/corporate policy
determine the exchange rate to be used for this conversion.
What is Foreign Currency?:
From business perspective “Foreign Currency” is the currency of another country. From accounting
systems perspective any Currency other than the Accounting Currency is a Foreign Currency. For a
company that maintains its accounting books in US Dollars any other currency apart from US Dollars is a
foreign currency and needs to be converted to US Dollars for recording transaction in the financial
books.
Multi‐Currency Concepts.:
Applicability of multi‐currency creates a need to understand some foreign currency concepts like
Conversion and Translation, Revaluation and Foreign Currency Exchange Gain and Loss. These concepts
require broader discussion and have been covered in our tutorial on Multi‐Currency Concepts.
- 19. 2.0 GENERAL LEDGER CONCEPTS 2012
© Chartered Technofunctional Institute Page 18
Recurring Journals can be created by having:
Same Account Combinations with no amounts:
o This is useful when same accounts needs to be used every period however the amounts
get changed every time. In this scenario the template is defined with no amounts and
amounts are entered manually every accounting period for which the entry needs to be
generated.
Same Account Combinations with fixed amounts:
o This is useful when both accounts and amounts can be pre‐determined. A good example
for this scenario is fixed rent payable each month on a specific date. In this case the
template is defined with actual amounts and journals are created and posted for
relevant accounting periods.
Same Account Combinations with mathematical logic to calculate amounts:
o This is useful when accounts can be pre‐determined and amounts will be based on some
logic or pre‐defined formula. A good example for this scenario could be defining
salesmen accounts as the pre‐determined accounts. Commission is to be paid to these
salesmen as a fixed percentage of sales made by each salesman during the month and
sales for each salesman are recorded in separate accounts. A recurring journal can be
defined that can look for the balance in respective sales accounts at the end of period
and automatically calculate commission and create the required accounting entry for
commission payable.
Examples of Recurring Journals
Fixed Rent to be paid every month
Fixed Insurance to be paid every month
Leasing Payments
Amortization Expenses
Fixed Expenses
Payroll Expenses
Based on Usage – Like departmental allocation of rent based on space utilized
Generic Process to Create Recurring Journals:
1. Define Accounts, Amounts or Formula or Logic
2. Create Recurring Template
3. Define the accounting periods for which the recurring journals need to be created
4. Generate Journals by Running automated recurring journals creation program
5. Enter missing data in case of Skelton journals – missing amounts
6. Review, Edit, Approve and Post recurring journals
- 20. 2.0 GENERAL LEDGER CONCEPTS 2012
© Chartered Technofunctional Institute Page 19
2.12 Allocations:
Allocation is the act of distributing according to a plan.
Examples of Allocation:
Distributing rent to departments based on area
Distributing common project costs to various cost centers
Distributing head office expenses to sales offices based on volume of sales
In the example shown here we have a company which has taken a 1000 square feet office space on rent.
The expenses for rent are borne by the head‐office and payment to the landlord is also made by the
head office. To know the true profitability of each of the departments (Department A, B & C) the rent
needs to be allocated to each one of them.
Each department occupies different area and company has taken the measurement of the areas
occupied by each of the department. In the example shown here, the rent is being allocated to different
departments based on their usage factor. This is an example of the concept of allocation and automated
accounting systems help handle complex allocations programmatically.