Finance - General Ledger Overview

FINANCE – GENERAL LEDGER ‐ GENERAL LEDGER OVERVIEW 2012

© Chartered Technofunctional Institute Page 1

Slide 1
Introduction to General Ledger

Chartered Techno functional Institute brings to you Techno functional Body of Knowledge
series on General Ledger under the process area of Finance.
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In today’s tutorial we will learn the concept of General Ledger and its role in any automated accounting
packages including E R P’s like Oracle and SAP. We will understand what we mean by General Ledger,
what are the functionalities offered by General Ledger and the financial processes that happen in GL.
This will provide us with the understanding of the key functional areas of any General Ledger System
and will be beneficial to any professional working on a project that includes General Ledger. The
intended audience for this tutorial is anybody who wants to understand the overview of GL irrespective
of his I T background. For I T professionals this overview lesson relates the GL concepts to automated
accounting systems.



TechnoFunc is on a mission to create “Technology Independent Expertise”.
Let’s start the lesson and move to first topic on what is general ledger.
Slide 2
What is a General Ledger?

The general ledger is a collection of the group of accounts that supports the value items shown in the
major financial statements. Every corporation needs to prepare financial statements like Balance Sheet
and Profit and Loss Account. General Ledger provides the detailed account balances for the formation of
these financial reporting’s.
General Ledger is the central repository for all transactions that get recorded in various supplemental
books, which are known as modules or sub ledgers in many ERP’s and Automated Accounting Packages.
Examples of supplemental books in traditional accounting are sales books for sales, purchase books for
purchases, cash and bank book for cash related transactions and general journals book to capture
adjustment entries. In “Automated Accounting Packages” these supplemental transactions are recorded
in modules like Accounts Payables, Accounts Receivables, Purchase or Inventory. In Accounting Packages
or in ERP’s like Oracle and SAP “General Ledger” is the central repository of all accounting information.



For any company that has large number of transactions, putting all the details in the general ledger is
not feasible. Hence it needs be supported by one or more subsidiary ledgers that provide details for
accounts in the general ledger.
Transactions V/s Financial Transactions:
Business enters into many activities and transactions throughout the day. It is not necessary that all
activities have financial impact. For an example, if a company issues a Purchase Order for buying certain
goods, no financial transaction has happened unless the goods are delivered and invoice is raised on the
company issuing the purchase order. All transactions that have financial impact only need to be
recorded in General Ledger.
The diagram here depicts that all activities or transactions get recorded in various Sub‐Ledgers
irrespective of whether they have a financial impact or not. Transactions having financial impact are only
posted to the General Ledger. These transactions build balances in accounts and from these accounts,
the Financial Statements are generated.
Let’s move to next topic to understand what are subsidiary ledgers.
Slide 3



Subsidiary Ledgers:
Balances in General Ledger are often supported by various sub ledgers. A subsidiary ledger is a group of
similar accounts whose combined balances equal the balance in a specific general ledger account.
Subsidiary Ledgers facilitate recording of complete financial and other information related to the
transaction.
To give you an example; In the Fixed Assets Subsidiary Ledger you can find all the details pertaining to
fixed assets owned by the company. Apart from the financial details like cost of the assets, other
information like date of purchase, date when asset was put to use in business, name of the supplier,
storage and location of the asset etcetera is also captured in subsidiary ledgers.
The general ledger account that summarizes a subsidiary ledger's account balances is called a Control
Account or master account. Accounting transactions are captured in General Ledger at a summarized
level and all relevant details for that transaction are available in the subsidiary ledgers.
Diagram on the right depicts some of the commonly used subsidiary ledgers, they are “Fixed Assets”,
“Accounts Payable”, Accounts Receivable”, “Projects” and “Inventory Management” and they all send
the financial data to the General Ledger.
Let’s now understand the concept of Subsidiary Ledger by having a look at Accounts Receivable Process:
We have “Accounts Receivable” (AR) subsidiary ledger that includes a separate account for each
customer who makes credit purchases. The combined balance of every account in this AR subsidiary
ledger equals to the balance of “Accounts Receivable Account” in the general ledger. “Accounts
Receivable Account” is also known as “Customer Receivable Control Account”.
Subsidiary ledgers contain supplemental accounts that provide the detail to support the summary
balance in a control account. Subsidiary Ledgers also capture details pertaining to financial transactions
like “Tax Numbers”, “Contact Person”, “Telephone Number” or “Copy of Invoice”. In I T; subsidiary
ledgers are also called Modules in the accounting system.
Let’s move and see some examples on subsidiary ledgers.



Slide 4

Example of Subsidiary Ledgers
If a company does not maintain the Sub Ledgers and keeps all the information in the General Ledger,
Imagine what will be the size of your General Ledger, if you have 8000 customer accounts, 4000 supplier
accounts and, 2000 items you trade in. On an average you enter into 5000 different transactions with
your suppliers and customers who are spread across the globe. Looks scary.. ahhh
Subsidiary Ledgers help manage and store specific information regarding each of the control accounts in
your GL. You can keep all the details in your sub ledgers and post the summation for each account in the
control account maintained at the General Ledger.
Some commonly used Subsidiary Ledgers are:
“Accounts Payable” – Accounts Payable, which is also abbreviated as “A” “P” is used to manage
suppliers and payments to suppliers. Main transactions are recording of invoices for purchases and
managing the payments for these invoices. From Accounts Payable sub ledger you can get details of
amounts payable to any supplier at any point in time.



“Accounts Receivable” – Accounts Receivable, which is also abbreviated as “A” “R” is used to manage
sales of goods and services to customers and entering receipts for the sales made. Main transactions are
recording of sales invoices and managing the receipts from the customers. From Accounts Receivable
sub ledger you can get details of amounts receivable from any customer at any point in time.
“Inventory”– Inventory Ledger, is used to manage your stock or items you buy, sell or manufacture.
Inventory Ledger is used to manage item prices and movements of stock items due to trading
transactions. From Inventory sub ledger you can get details of quantity and cost price of any inventory
item at any point in time.
“Fixed Assets” – Fixed Assets, which is also abbreviated as “F” “A” is used to manage purchase, sale,
allocation and retirement of fixed assets. Depreciation on assets is calculated in this ledger to depict the
current value of the Fixed Assets. Main transactions are recording of purchase of fixed assets, calculating
depreciation on assets and retirement of assets. From Fixed Assets sub ledger you can get details of any
fixed asset like original cost, current depreciated value, location etcetera at any point in time.
“Projects” – Certain companies like Real Estate Builders and Construction Companies undertake various
independent projects. They are interested in financial information for each of the project. In that case a
sub ledger is required for each project. “Projects” is used to track project milestone, costs and resources
and to make billing to the customers. From “Projects” sub ledger you can get details of any project like
percentage complete, current cost etcetera at any point in time.
“Cash Management” – Similarly “Cash Management” sub ledger is used to manage cash and its
reconciliation with bank. It provides you with the current position of the cash flows.
“Payroll” – Payroll subsidiary ledger can be used to manage salaries and wages. You can record
calculations & payments made to each of the employee in this sub ledger.
Now as we have basic understanding of GL and its subsidiary ledgers let’s look at some benefits of
having an automated general ledger system.



Slide 5

GL in Accounting Software:
Now we understand that the “General Ledger” is the central repository for all financial activity. The main
purpose of a general ledger system is to record financial activity of a company and to produce financial
and management reports to help stakeholders make decisions. Stakeholder can make effective decisions
only when the underlying financial data is available timely on demand and correct.
A good general ledger software application will provide management with accurate, up‐to‐date
information in order to make short and long term business decisions. It also has inbuilt controls and
processes necessary, to ensure that the correct information is reported. Income statements, balance
sheets and statements of cash flow are standard reports needed by management to judge business
progress and these reports can be built using the trial balance created in General Ledger.
In an ERP or an Automated Accounting Package all other subsidiary ledgers (also known as modules),
sends financial data to General Ledger. Data from different modules can be imported automatically
using integrations with Sub Ledgers. General Ledger validates the financial data and updates the



balances to the respective accounts. Having a good General Ledger system and processes in place helps
the organizations in following ways:
Organizations can enforce a common Chart of Accounts structure across different processes, modules
and entities, enabling them to manage their financial processes in an integrated manner by allowing
greater flexibility and control over the journal entry process.
The general ledger is the foundation of any accounting system; it improves transaction processing and
control. It collects transaction details from other applications allowing preparation of key financial
reports. Control on Journal Entries creates an auditable record of business's complete financial history.
Using General Ledger Software allows for detailed report generation according to multiple report types
and report parameters ‐ facilitates better and faster decision making. The ability to access financial
records by departments, cost centers, or other accounting divisions, provides visibility to understand
business performance across the organization. It enables tracking critical information on company's
financial position and supplements it with various statutory and management reporting options.
Let’s now shift the focus on understanding the typical accounting cycle in automated general ledger
systems in the next topic.



Slide 6

Accounting Cycle:
Before you can start recording financial transactions in any books you need to have some basic
information available. The minimum required information is:
1. Nature of parties entering into the transaction (This leads to having chart of accounts).
2. Date when the transaction took place (This leads to having accounting periods and calendars).
3. Money involved in the financial transaction (This leads to having currencies).
Once you have all the three above, the typical accounting cycle works as follows:
1. Manage Accounting Periods/Calendars: You need to make available the Accounting Period in
which the transaction will take place.
2. Manage Currency: The currency used to make transaction needs to be available in the system.
3. Import Transactions/Record Transactions: If you are recording transactions in your subsidiary
ledgers, you need to import the financial portion (that is, Debit and Credit of transaction
amounts and accounts) to general ledger. Alternatively you can directly record these
transactions in the general ledger system.



4. Review Transactions/Edit Transactions: Once you have the transactions available in the general
ledger system, you can review them and edit them for any errors.
5. Transaction Approval: Segregation of Duties concept requires having more than one person to
complete the “Journal Creation Task”. In GL the separation by getting the financial transaction
approved by more than one individual prevents fraud and error.
6. Analyze and Manipulate: You can inquire your transactions and balances in General Ledger
System. You might need to analyze and manipulate your data to comply with your management
and statutory reporting needs. If any adjustments need to be done they can be carried out in
the General Ledger.
7. Manage Consolidation: You may need to consolidate your accounts for Statutory Reporting or
Management Reporting purposes. If your currencies between your various entities are different,
you may need to revalue and translate your balances. Then you need to bring all your balances
in common format for consolidation.
This process is called accounting cycle because this is an ongoing process. Accounting principle of
“Going Concern” assumes that the business will remain in existence for an indefinite period of time.
During this time, your accounting periods will change. At the end of the period you will consolidate
and close your books. Then you will open a “New” period and continue recording transactions. And
the accounting cycle continues forever with business cycle 
In the next topic we will understand the transaction flow in the General Ledger system.



Slide 7
GL Process Flow:

Create Journal/ Import Journal from Sub‐Ledger: Accounting Journals can be created directly in the
General Ledger. They can also be created in subsidiary ledgers and can then be imported to General
Ledger.
Review Journals: Once the Journal is available in the General Ledger System you can query that
journal. While reviewing the journal, you can make edits/corrections if required.
Approve Journals: Accounting prudence require that all financial transactions should be reviewed by
someone other than the person creating the transaction. Approval ensures validity and correctness
of the transaction.
Journals Post: Journals posting is a process of updating the database with the amounts. Once the
Journals are posted you can query for updated account balances.
Journals Balances Updated: Posting process updates the journal balances. You can inquiry the
account balances in General Ledger for all posted transactions.



Run Reports: General Ledger has many built in reports. Most common reports run from General
Ledger are Transactions Register and Trial Balance Report.
This is a generic general ledger process. Some systems may have slight variations to the above
process, but the underlying concepts remain more or less same!
Now we will understand what drilldown means in Automated Accounting Systems in the next
topic.
Slide 8
Inquiry & Drilldown:

In IT, to drill down means to move from summary information to detailed data by focusing in on
something. Clicking on an item moves you to a level of greater detail. Drilling down through a
database involves accessing information by starting with a general category and moving through the
hierarchy: from category to file, file to table, table to record, and record to field. Drilling down
provides a method of exploring multidimensional data by moving from one level of detail to the
next.



Automated General Ledgers incorporate drill down functionality to ensure you can view the
transactional details from the summary of balances. You can drill down to your sub‐ledgers details
from General Ledger and can get all of the transactions that comprise an account balance,
regardless of which sub‐ledger originated the transaction.
The basic steps are:
1. Inquire Online Account Balances or Summary Balances
2. View Accounting Information – You can drill down to Journal from Account Balance
3. Drill Down to Sub Ledger – You can drill down from Journal to Originating Sub‐Ledger
4 & 5. Further Drill Down to Sub Ledger Transaction – You can see the transaction in the Sub Ledger
and review all transactional details available at the Sub Ledger from General Ledger itself.
This is the last topic in basic GL overview chapter. In the next slide we will visit the topics that will
be covered in next chapter titled “GL Concepts”.
Slide 9



GL Concepts:

In the next part of this series we will focus on “GL Concepts” in detail to build strong conceptual
foundation. The topics for the next series are:
1. Accounting Periods and Calendars
2. Adjustment Period
3. Currency – Functional and Foreign
4. Chart of Accounts
5. Journals – Entry and Import
6. Posting & Balances
7. Review and Approval
8. Accruals and Reversals
9. Recurring Journals
10. Allocations
11. Intercompany
12. Trial Balance



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Finance - General Ledger Overview

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