Bookkeeping is a critical accounting activity that provides the solid financial foundation on which an

organization stands. The correctness and integrity of the financial statements that an organization produces
largely depend on the correctness and integrity of its bookkeeping activities. Entry of Journals and review and
posting to ledgers are the two core bookkeeping activities. The journals are where all transactions are first
recorded on a daily basis. Information from a journal is then posted to the ledgers to update each account.
Various accounts in the ledgers are then summarized, tested, and validated, and used for producing financial
statements at the end of an accounting period.

This section covers the key accounting skills of recording accounting transactions in a journal and then posting
them into subsidiary ledgers and summarizing them to the General Ledger. You'll be guided through examples of
appropriate general and special journals entries and you'll learn what we mean by general ledger and subsidiary
ledgers with a perspective from automated accounting systems. We will help you understand the fundamentals of
an effective automated general ledger system and subsequently explain all the important GL concepts including
how to analyze a transaction, record it in the appropriate journal, and then post it to the ledgers.  

This will provide learners 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 accounting
background.  For IT professionals this overview lesson relates the GL concepts to automated accounting
systems. Anyone either serving in an accounting role, or who just wants to have a working understanding of the
accounting and general ledger concepts, irrespective of previous experience in accounting can leverage this
section. A lot of concepts will be beneficial for finance experts as this section relates these concepts for an
effective and efficient automation. Learner will understand the concept of General Ledger and its role in any
automated accounting packages including ERP’s like Oracle and SAP. 

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Equity and Liability
Equity: The amount of the funds contributed by the owners (the stockholders) added or subtracted by
accumulated gains and losses. Equity is the residual value of the business enterprise that belongs to the
owners or shareholders.

Funds contributed by owners in any business are different from all other types of funds. Generally they
don’t have any cost of carrying for the business and in the event of winding up of the business
shareholders are entitled to the residual value of business after discharging all other liabilities. They are
expected to remain invested in business for a long period of time and no immediate payback is anticipated
in case of a going concern.

Equity accounts are also referred to as “Capital Account”, “Shareholder’s Funds” or “Accounts”, “Stock,
Stake” and “Shareholder Equity”.  Normally they have a credit balance and are reflected on the left side of
the balance sheet. Profits and losses from each accounting year are added to Equity at the end of each
year.

Balances in the Retained Earnings Account are transferred to “Equity” at the end of each accounting year.
While running a revaluation of balances, equity is revalued using the historical rates in accordance with
the accounting standards. Equity is a separate account type in ERP’s to segregate funds from owners and
others.

Liability: The amount of funds contributed by outsiders other than owners that are payable to them in
future. Liability is an obligation of an entity arising from past transactions or events, the settlement of
which may result in the transfer or use of assets, provision of services or other yielding of economic
benefits in the future.

Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities
are debts payable within one year, while long-term liabilities are debts payable over a longer period.

Liabilities can be from lot of sources like Loans, External Borrowings, Debt – Secured and Unsecured,
Obligation for services received, Balance Due or Credit due to Creditors. Some generally known examples
of liabilities are any type of borrowing or loans from persons or banks or wages or salaries payable to
employees or amounts payable to creditors for their goods and services and taxes payable to Governments.

Balances in the Equity and Liability Accounts are carried forward to next year after the close of the
accounting year. While running a revaluation of balances, liability is revalued using the period end rates in
accordance with the accounting standards. Liability is a separate account type in ERP’s to segregate funds
from owners and others.

Intercompany transactions also results in receivables and liabilities (payables) between different units of
the same entity. Such transactions are settled in cash if they are in the normal course of business. At the

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time of final consolidation of accounts, these intercompany liabilities and assets needs to be eliminated
from the books of the parent entity. We will discuss this concept in detail in Intercompany chapter.

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Fundamental Accounts:
Whenever IT professional starts working on any financial project, they encounters certain accounts and
account types that are always seeded in the system, they are able to perform setups for those accounts after
going through the manual of the software package, but usually explanation about the need and role of
these accounts is not available in the product manual/guide . In this tutorial we will understand what are
the minimum accounts types that need to be seeded in any financial system and "why" certain accounts
have to be mandatory in nature before the automated accounting process can start.

The intended audience for this tutorial is anybody who has a need to work on any financial IT system.
This will be helpful to everyone who wants to understand how to design and implement effective
automated accounting systems like ERP's. This tutorial focuses on these concepts from the perspective of
an IT professional that is expected to work on any project involving design, build or interface to an
automated GL system, rather than a student of accounting.

Fundamental Accounts: Business operations may result in financial benefits or losses that arise as a
difference of revenue gained from a business activity and expenses, costs and taxes needed to sustain the
business activity. Any resultant profit or loss goes to the business's owner. Funds can be invested by
owners or outsiders known as equity & liabilities and can be used to acquire assets to perform business
activities.  All general ledger accounts can be classified as belonging to either one of these categories –
Equity, Liabilities, Assets, Revenue and Expenses. These are the fundamental account types from the
perspective of automated accounting systems. Based on this classification, closing balances are never
carried forward in automated GL systems for Revenue and Expense Accounts.

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General Ledger System Accounts
Whenever IT professional starts working on any financial project, they encounters certain accounts and
account types that are always seeded in the system, they are able to perform setups for those accounts after
going through the manual of the software package, but usually explanation about the need and role of
these accounts is not available in the product manual/guide . In this tutorial we will understand what are
the minimum accounts types that need to be seeded in any financial system and "why" certain accounts
have to be mandatory in nature before the automated accounting process can start.

In the later half we will discuss some special purpose accounts like Suspense Account, Clearing Account
etc. and will focus our discussion on understanding what these accounts are and what roles these accounts
play in an automated ERP system.

The intended audience for this tutorial is anybody who has a need to work on any financial IT system.
This will be helpful to everyone who wants to understand how to design and implement effective
automated accounting systems like ERP's. This tutorial focuses on these concepts from the perspective of
an IT professional that is expected to work on any project involving design, build or interface to an
automated GL system, rather than a student of accounting.

For Information Technology professionals this overview lesson relates important GL accounts to
automated accounting systems and will help them understand the role these commonly used accounts play.
This chapter will provide a foundation knowledge that will be helpful to IT implementers explain the
future design and ERP functionalities to the end users more effectively. In the setup stages this will ensure
that implementers understand the key differences between different types of accounts and they are able to
classify client's financial data correctly.

During the requirements stage understanding of the system accounts will help professionals ask relevant
questions to understand company's business processes creating needs for these system accounts. We
recommend sharing the video and concepts of this tutorial with the super users before the requirements
gathering session to enable an effective discussion on requirements around system accounts.

The concepts presented in this chapter are conceptual in nature and they are applicable to all accounting
systems irrespective of the underlying technology. Understanding of these concepts is perquisite to define
and work on an automated General Ledger. This topic is beneficial to both IT professionals as well as end
users. Persons seeking specialized accounting knowledge will also benefit from these discussions.

Mandatory accounts in GL can be classified into two broad categories – Fundamental Accounts and
Special Purpose Accounts. In this part of this series we will focus on defining these account types and will
explore the conceptual knowledge behind these accounts. During this tutorial we will be doing a deep dive
into both account types, discussing individual accounts in detail.

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Fundamental Accounts: Business operations may result in financial benefits or losses that arise as a
difference of revenue gained from a business activity and expenses, costs and taxes needed to sustain the
business activity. Any resultant profit or loss goes to the business's owner. Funds can be invested by
owners or outsiders known as equity & liabilities and can be used to acquire assets to perform business
activities.  All general ledger accounts can be classified as belonging to either one of these categories –
Equity, Liabilities, Assets, Revenue and Expenses. These are the fundamental account types from the
perspective of automated accounting systems. Based on this classification, closing balances are never
carried forward in automated GL systems for Revenue and Expense Accounts.

Special Purpose Accounts: Enterprise resource planning (ERP) systems integrate internal and external
financial and non-financial information across an entire organization. Transaction flow happens between
many inter-dependent processes and business units embracing finance/accounting, manufacturing, sales
and service, customer relationship management etc. When one end to end transaction needs to be routed
through multiple processes and modules, special purpose accounts helps in tracking financial flow and
facilitates accounting reconciliation among different input and output transactional processes.

New category of accounts also classified as “Special Purpose Accounts” like Contra accounts,
Intercompany accounts, Clearing accounts and suspense accounts etc. are defined to track the entire
financial flow and identify and reconcile intermediary handoffs.

In any business that is going for large automated accounting systems, you can expect and large number of
business transactions and parallel and sequential processes catering to different business requirements.
Let’s try to understand some flows that are happening at all times:

Business Flows: The business has its own legal and physical structure. It deals in products or services and
interacts with lots of third parties like suppliers and customers who interact with accounting systems while
performing normal business transactions with the entity. If business transactions results in financial
transactions, these business flows interact with the organization’s Accounting Flows.

Internal Process Flows: Company has its own set of rules, procedures and processes to perform business
activities. Creating repeatable business processes is an important part of building and running an effective
organization. Well-designed and documented business processes are critical for the success of business
activities. These internal process flows also encompasses material flows. For example before releasing the
material to end customer it needs to be moved from wholesale warehouse to retail warehouse. These
process flows are for normal business activities and when these activities are financial in nature they
interact with Accounting Flows.

Accounting Flows: For each of the processes whether they are internal or external, effective systems
should automatically assist generation of accounting entries and track inventory, assets, liabilities and
profitability of the organization. In these internal processes there is a need to break the accounting
transaction into sub-transactions to identify and track these interdependent steps in these flows. For
example when the material is received from the supplier, debit the inventory account and credit the AP
Clearing Account (Because at that particular step, Payables Department has not received the invoice for
the material received). Once the invoice is recorded in the subsequent Payables Process, clearing account
can be netted off with the actual liability account.

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This helps us understand how one single transaction needs to be routed through multiple processes and
modules. These special purpose accounts helps in tracking financial flow and facilitates accounting
reconciliation among different transactional processes as explained in our example for Inventory and
Payables. These clearing accounts are classified as “Special Purpose Accounts” and are used to track the
entire financial flow and identify and reconcile intermediary handoffs.

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Accounting Cycle
Accounting Cycle is the collective and repetitive process of recording and processing the accounting
events of a company in different accounting periods. The series of steps begin when a business transaction
occurs and end with the period closure where the cycle is again repeated.

We have discussed the five steps of accounting process in the article “The Accounting Process”. Those
five steps were:

 Step1: Identifying Business Stakeholders

 Step2: Understanding Accounting Needs
 Step3: Identifying Accounting Transactions
 Step4: Recording Transactions
 Step5: Preparing Accounting Reports

The perquisite for accounting cycle to begin in automated systems is that you have already identified your
stakeholders and have designed an automated accounting system to cater to their reporting and recording
needs. You have established system in place to identify accounting transactions. Once you have identified
your accounting transactions, the next step is to record them into your accounting system.  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 has eight recurring steps that are explained
below:

1. Manage Accounting Periods/Calendars:

Accounting Period in bookkeeping is the period with reference to which accounting books of any entity
are prepared. It is the period for which books are balanced and the financial statements are prepared. As a
general practice the accounting period consists of 12 months and might follow the natural calendar,
however many companies define different lengths of dates as their accounting periods as explained in
Accounting Periods and Calendars article.

The accounting period groups the transactions pertaining to a specified date range and facilitates the
reporting of financial activity for that period. You define accounting periods in automated accounting
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systems to generate financial reports at the end of the period. Periods needs to be opened before any
transaction can be entered for any accounting period. The first step in accounting cycle is to make
available the “Accounting Period” in which the transaction will be recorded.

2. Manage Currency:

Currency is the generally accepted form of money which is issued by a government and circulated within
an economy. Currency is used as a medium of exchange for goods and services. Every nation has its own
currency and global trade results in exchange of currencies of different countries.

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. The accounting currency may not necessarily be same as the transacting currency.
Transacting Currency is the currency which customers deal with when conducting a transaction.
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). You can
explore currency concepts in the article on “Currency”.

However the automated systems provides you with the flexibility to enter transaction in the transacting
foreign currency and has the capability to convert that entered amount into functional or accounting
currency using the appropriate exchange rate. For this to happen, relevant currencies must be defined in
the system and need to be available for recording the transaction.

3. Import Transactions/Record Transactions:

In the previous lesson we saw some examples of commonly used subsidiary ledgers. Companies
extensively use modules like accounts receivable subsidiary ledger, accounts payable subsidiary ledger or
creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets or property or plant & equipment
subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger and cash receipts or
payments subsidiary ledger, to capture their source transactional data.

If you are recording transactions in your subsidiary ledgers, you need to import the financial and economic
impact, that is, Debit and Credit of transaction amounts and accounts to general ledger. Importing
transactions in automated accounting systems is an automated process.

General Ledger also allows users to directly add transactions in the GL. In that case you need to follow the
accounting principles and the steps explained in accounting process. This step completes the recording
transactions process.

4. Review Transactions/Edit Transactions:

The transactions can be reviewed for accuracy and completeness once they have been entered in the
automated accounting system. If review is done by another person who is not responsible or involved in
recording the transaction it can help to ensure that financial information in the journals accurately reflects
actual activity.

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Review of transactions is done to ensure that the transaction is within the guidelines of the purpose of the
accounts used and is appropriately charged to the account following the concepts defined in accounting
equation. In case of manual journals one must ensure that the transaction is consistent with available
supporting documents. If any errors are found in the transaction, they can be edited and corrected at this
stage.

5. Journal Approval:

Segregation of Duties concept requires that the responsibility for related operations should be divided
among two or more persons. This decreases the possibility of errors and fraud. In case of journal recording
the journal entered by one person needs to be approved by another person in this step. This ensures 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.

Automated accounting systems provide you with the functionality of sending the journals for approval to
the designated person. The system will validate the journal batch, determine if approval is required, and
submit the batch to approvers (if required), then notifies appropriate individuals of the approval results.

6. Analyze and Manipulate:

You can inquire your transactions and balances in once they have been entered, approved and posted in
the General Ledger System. You might need to analyze and manipulate your data to comply with
accounting standards and policies. You also may need to pass adjustment entries to tie your management
books with the statutory books.

The analysis and updating of accounts at the end of the period before the financial statements are prepared
is called the adjusting process. The journal entries that bring the accounts up to date at the end of the
accounting period are called adjusting entries. If any adjustments need to be done they can be carried out
in the General Ledger. All automated accounting systems and ERPs provide you with the flexibility of
analyzing and manipulating accounting data to make adjustments.

7. Manage Consolidation:

Consolidation is a bringing together of the financial statements of the investor (usually called the parent
company) and the investee (typically referred to as its subsidiary). Consolidation in financial accounting is
a technique that summarizes a group of companies' financial statements into one. This enables the
management and investors to have a holistic view of the financial affairs of the whole group together. The
aim of consolidated financial statement is to show the performance of the group as if it were a single
entity.

Doing consolidation typically involves a complex set of eliminating and consolidating entries to work
back from individual financial statements to a group financial statement that is an accurate representation
of the operations of the group as a whole. This process involves elimination of all intra-group transactions
(example: sales from one group company to another group company) and intra-group balances (example:
intercompany loans).

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In automated systems the consolidation process need to happen at account level and all similar accounts
needs to be mapped to the consolidation set of accounts. One might need to adjust periods so that each of
the consolidating units covers the same time periods for the consolidation to be accurate. If the currencies
between various entities are different, revaluation and translation of balances must happen before
consolidation process. For this process the perquisite is to bring all your balances in common format for
consolidation.  Every ERP supports consolidation and it is a very important step of companies that have
large number of legal entities.

8. Generate Financial Reports:

Finally, once the consolidation has happened if required, the next logical step in accounting cycle is to
prepare the business reports and provide them to the stakeholders according to their informational needs.
Double entry system enables accountants to prepare some standard reports like trial balance, profit and
loss account and balance sheet. Accounting reports are based on generally accepted accounting standards
and these reports are powerful tools to help the business owner, accountant, banker, or investor analyze
the results of their operations.

All ERPs and automated accounting systems come with large number of seeded reports, as well as provide
tools to perform all demand reporting. Special recurring reports can be designed once and used at the end
of every accounting period.

Why Accounting Cycle?

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. Previous period for which the accounting process has completed and financial reports
have been generated and no further adjustment entries are anticipated, is closed. Then a “New” period is
opened and the steps starting from recording transactions are repeated till consolidation for the current
period happens. And the accounting cycle continues forever with the business cycle!

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Accounting Methods
Accounting Systems: Single Entry and Double Entry:

There are two common systems of bookkeeping single entry and double entry accounting system. The first
– single entry – is simplistic, recording each transaction only once, either as revenue or as an expense.
Single entry bookkeeping is suitable for organizations that have very less transactions, very few or
negligible assets and liabilities. But when you need a more sophisticated bookkeeping system double entry
bookkeeping system provides you with the tools necessary to represent your accounting data in a
meaningful way for use by the stakeholders. Double entry bookkeeping has become the standard, and is
the preferred way of accounting, as it allows businesses to track both the sources and application of
money.

Accounting Methods: Cash V/s Accrual:

Two types of accounting methods are commonly used to record business transactions know as cash
accounting and accrual accounting. Under the cash accounting method, revenue is recognized and
recorded when the cash is received and expenses are recognized and recorded when the cash payments are
made. Under the accrual method of accounting, revenue and expenses are recognized and recorded, when
the product or service is actually sold to customers or received from suppliers, generally before they're
paid for.

While many small businesses and generally the professionals and professional organizations, use the cash
method of accounting, but most businesses tend to use the accrual method. Typically, the single entry
bookkeeping system is used along with the cash method, while the double entry system can be used with
both the cash and accrual methods. The most common combination is double entry bookkeeping and the
accrual method.

Accounting System1: Single Entry Accounting System:

A single-entry bookkeeping system or single-entry accounting system is a method of bookkeeping relying

on a one sided accounting entry to maintain financial information, based on the income statement (profit
or loss statement). The system records the flow of income and expenses through the use of, daily summary
of cash receipts and disbursements. The single-entry bookkeeping method records entries once and does
not "balance" the transaction out by recording an opposing credit or debit.

A single-entry system may consist only of transactions posted in a notebook, daybook, or journal.
However, it may include a complete set of journals and a ledger providing accounts for all important
items. A single-entry system for a small business might include a business checkbook, check
disbursements journal or register, daily/monthly summaries of cash receipts, a depreciation schedule,
employee wages records, and ledgers showing debtor and creditor balances."

Under the method the intent is to record the bare-essential transactions. In some cases only records of
cash, accounts receivable, accounts payable and taxes paid may be maintained. Records of assets,
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inventory, expenses, revenues and other elements usually considered essential in an accounting system
may not be kept, except in memorandum form. Single-entry systems are usually inadequate except where
operations are especially simple and the volume of activity is low. Single-entry systems are used in the
interest of simplicity. They are usually less expensive to maintain than double-entry systems.

Accounting System2: Double Entry Accounting System:

Double-entry accounting is a system of organization that records financial transactions in an efficient

manner and has been used by accountants for over 500 years. Since the fifteenth century, when Luca
Pacioli first wrote about the practice, the term "accounting" has referred to double-entry accounting.
Double-entry accounting uses a system of accounts to categorize transactions. Each transaction that is
entered consists of one or more debits and credits, and the total debits must equal the total credits.

The double entry bookkeeping system assumes that when a transaction takes place, it impacts two
different accounts, one as a debit and the other as a credit. Therefore each transaction is recorded twice. A
transaction may also affect more than two accounts, but its total credit amount will always match its total
debit amount.

Before a transaction can be recorded, it must be analyzed and classified to determine the accounts it
affects and how it affects them. At least two accounts are affected – one with a debit and one with a credit.
Some accounts are increased by debit and others are increased by credit.

Checks & Balancing in Double Entry Accounting Method:

Double-entry accounting provides a system of checks and balances, where the accuracy of the system can
be verified by reconciling asset, liability, and equity accounts to external sources. You can uncover simple
errors, such as transposing numbers or misplacing a decimal point, when you reconcile accounts.

For example, the bank account is reconciled to the bank statement, accounts payable can be reconciled to
statements received from suppliers, and accounts receivable can be verified by confirming balances with
customers. The inventory account is reconciled by taking a physical count of inventory and comparing the
physical account to the accounting records. Because each entry in a double-entry system affects two or
more accounts, and debits and credits are equal overall, in a given period of time, balancing the trial
balance and reconciling the balance sheet accounts provides a high degree of probability that the profit
and loss accounts are correct.

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Accounting Periods and Calendars
What is an Accounting Period?

Accounting Period in bookkeeping is the period with reference to which accounting books of any entity
are prepared. It is the period for which books are balanced and the financial statements are prepared. In
accounting, financial results are measured by periods.  Any period with a defined beginning and end can
be used for an accounting period.

Why we need Accounting Periods?

The accounting entity is viewed as a going concern and is expected to have a fairly long life. To determine
the exact profit or loss of a business enterprise one need to find that realizable difference between the end
value of equity at closure and the investment into the business by the owners. The real valuation can be
determined only on when the enterprise is liquidated.

But the owners need to know the profitability of the business on an ongoing basis to make informed
business decisions. Hence, to overcome this problem, the accountants have developed the “Concept of
Periodicity” for reporting the periodical progress of a business entity. This period for which the enterprise
is determining and reporting its operational profit is the accounting period.

Why organizations use different Accounting Periods?

Generally, the accounting period consists of 12 months but we see differences among the way different
organizations define their accounting period. There exist multiple reasons for the same.

Regulatory Reasons: Some periods are set by outside authorities and in that case the beginning of the
accounting period differs according to the jurisdiction. For example one entity may follow the regular
calendar year, i.e. January to December as the accounting year, while another entity may follow April to
March as the accounting period. The International Financial Reporting Standards even allows a period of
52 weeks as an accounting period instead of a proper year.  Most of the times organizations choose to go
with the statutory prescribed fiscal period like going with the periods they need to have for tax purposes.
Many countries have prescribed accounting periods which do not follow natural calendar and these
periods are compulsory to be followed by all organizations conducting business in that country. In that
case multi-national companies also need to follow the same period for the operations conducted in that
country. This also creates different accounting periods as compared to the global parent company.

Business Specific Reasons: Sometimes business circumstances are very compelling to warrant different
accounting periods and in that case accounting periods are set solely at the discretion of the company
based on their specific business needs, and as explain ned above, organizations are allowed to define as
many periods as they want as long as they meet legal requirements.  For example, many restaurants,
nearly all the larger chain operators, define their accounting period consisting of four weeks. They have 13
four week periods a year, instead of 12 monthly statements.  The business reason being, most restaurants
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do 45% to 60% and even more of their weekly sales on two days of the week, normally Friday and
Saturday. This makes it difficult to compare results using monthly periods as number of week-ends differ
from month to month.

What are some commonly used accounting calendars and periods?

Natural Calendar: Generally, the accounting period consists of 12 months and might follow the natural
calendar. Natural Calendar follows the natural sequence of months from January to December.

Special Calendar: Any calendar not following the natural months is “Special Calendar”, for example,
special calendar from “April to March”. In some countries the beginning of the accounting period differs
according to the jurisdiction. For example in India the prescribed accounting year is from April to March.
The Australian government's financial year begins on July 1 and concludes on June 30 of the following
year. The Financial Year in Costa Rica spans from October 1 until September 30 of the following year.

Fiscal Calendar: The International Financial Reporting Standards allows up-to period of 52 weeks as an
accounting period also known as “Fiscal Calendar”. Large number of companies use 52 weeks fiscal
calendar for their reporting and financial tracking purposes. Many companies find that it is convenient for
purposes of comparison and also for accurate stock taking to always end their fiscal year on the same day
of the week, where local legislation permits. Thus some fiscal years will have 52 weeks and 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.

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 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.

What is the need for period end entries?

Transactions Spanning Multiple Periods: The transactions have to be identified with the particular
accounting period. However in practice, many business transactions affect more than one accounting
period like the assets held with organization, insurance premium paid in advance, goods sold on credit,
capital work in progress etc.

Matching Concept: The matching concept is an accounting principle that requires the identification and
recording of expenses associated with revenue earned and recognized during the same accounting period.
Under the matching principle accounting transactions needs to be related to specific accounting periods so
that the corresponding revenues and expenses can be accounted for in the same accounting period. This
necessitates the need to pass period end accounting entries.

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.

What are Adjustment Periods?

Adjustment Entries and period end entries add complexity to consolidation processes and automated
general ledgers help manage these complicated adjustments. ERP 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”. 

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Accruals
The Accounting Methods:

There are two commonly used methods of accounting - Cash Basis and the Accruals Basis.  In cash basis
of accounting income is recognized in books when it is received in cash, and expenses are offset when
they are actually paid.

Cash Basis Accounting:

Some businesses use the cash basis of accounting. Under the cash basis of accounting, revenues and
expenses are reported in the income statement in the period in which cash is received or paid. For
example, fees are recorded when cash is received from clients, and wages are recorded when cash is paid
to employees. The net income (or net loss) is the difference between the cash receipts (revenues) and the
cash payments (expenses).Contrary to Cash Basis Accounting, in Accrual Basis Accounting, financial
items are accounted when they are earned and deductions are claimed when expenses are incurred,
irrespective of the actual cash flow.

Cash basis accounting is not considered indicative of economic realities, thus the requirement for accrual
accounting except for certain kinds of companies, such as very small businesses and some not-for-profit
organizations. These businesses may use the cash basis, because they have few receivables and payables.
For example, attorneys, physicians, and real estate agents often use the cash basis. For them, the cash basis
will yield financial statements similar to those prepared under the accrual basis. For most large businesses,
the cash basis will not provide accurate financial statements for user needs. For this reason, we need to
understand the significance and principles guiding the accrual concept.

Accrual Basis Accounting:

Accrual accounting method measures the financial performance of a company by recognizing accounting
events regardless of when corresponding cash transactions occur. Accrual follows the matching principle
in which the revenues are matched (or offset) to expenses in the accounting period in which the
transaction occurs rather than when payment is made (or received).

Significance of Accrual Basis Method:

When accountants prepare financial statements, they assume that the economic life of the business can be
0divided into time periods. Using this accounting period concept, accountants must determine in which
period the revenues and expenses of the business should be reported. To determine the proper period,
accountants use generally accepted accounting principles, which require the use of the accrual basis of
accounting. Accrual accounting is considered to be the standard accounting practice for most companies
and is the most widely used accounting method in the automated accounting system.

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This method provides a more accurate picture of the company's current condition, but as all income and
expenses need to be recognized based on their occurrence and matching, it is relatively complex when
compared to cash accounting, which recognizes transactions only when there is an exchange of cash. The
need for this method arose out of the increasing complexity of business transactions and investor demand
for more timely and accurate financial information.

Many small and large businesses keep their books on the accrual basis, usually for one or more of three
reasons:

 They're concerned about gross margin on products they sell.

 They want to really know when they're making money and when they're not.
 They're required by lenders, investors, or government authorities to report their activities that
way.

These are all good reasons to use accrual basis accounting, and most experts would commend that choice.
But many of these same companies look only at their income statements and often don't even prepare cash
flow reports. Instead they rely on good old rule-of-thumb methods to manage the cash so that they don't
run short or let unused cash sit idle.

Accruals: The Revenue Concept

Under the accrual basis of accounting, revenues are reported in the income statement in the period in
which they are earned. For example, revenue is reported when the services are provided to customers.
Cash may or may not be received from customers during this period. The accounting concept that supports
this reporting of revenues is called the revenue recognition concept.

Accruals: The Matching Concept

Under the accrual basis, expenses are reported in the same period as the revenues to which they relate. For
example, electricity expenses are reported as an expense in the period in which it was consumed to
provide services to customers, and not necessarily when the bill is paid. The accounting concept that
supports reporting revenues and related expenses in the same period is called the matching concept, or
matching principle. By matching revenues and expenses, net income or loss for the period will be properly
reported on the income statement. The GAAP concept that governs this is called the matching principle.
Expenses should be matched to benefits, which means recorded in the period of time that benefited from
the expenditure rather than the period of time in which the expenditure occurred. The accounting concepts
that reflect this principle include Depreciation, Amortization, Accruals, Reserves and Prepaid expenses.

Series of adjustments called accruals and deferrals is usually needed to bring the financial records in line
with reality. There are always some events and activities that have not been incorporated into the
accounting records. We will discuss the nature of these adjusting entries in detail in the next article.

Some Examples:

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To help you understand this concept let’s look at an example. A company has sold merchandise on credit
to a customer who is credit worthy and there is absolute certainty that the payment will be received in the
future. The company earns a profit of $500 on the total sales price of $2000. The accounting for this
transaction will be different in the two methods. The revenue generated by the sale of the merchandise
will only be recognized by the cash method when the money is received by the company which might
happen next month or next year.  However in the Accrual Method the revenue will be recognized in the
same period, an “Accounts Receivable” will be created to track future credit payments from the customer.

The accounting rules outlined in GAAP require that most companies keep their accounting records on the
accrual basis. Let’s consider another example:

When the Sales Department obtains an order from one of your customers and the product is shipped to the
customer, a sale has been consummated and it is recorded. This transaction will appear on the income
statement even though not a single dollar may have passed from the customer to your company, because
the customer has an open account with the company. The transaction is recorded by increasing Sales and
by increasing Accounts Receivable, the amount due from your customer.

Later on, perhaps the following month, your customer pays his or her bill and your company receives the
cash. That transaction will not appear on the income statement. It was already recorded as income when
the sale was made and, under accrual accounting rules; only the sale itself is considered an income-
producing event, not the act of collecting the money.

This example demonstrates the essence of accrual basis accounting. Transactions are recorded when an
economic event is deemed to have occurred. A sale is an economic event because a binding agreement has
been reached: your customer agreed to accept the merchandise and pay for it in due course and your
company shipped the merchandise on your customer’s promise to pay. That is an economic event, an offer
made and accepted.

The customer's payment is another economic event. It is related to the first, but it is nevertheless a new
event. The customer might have chosen to delay his or her payment or return the merchandise, but chose
instead to pay for it. The second economic event doesn't affect Sales. However, it affects the balance in the
customer's account and it increases your company's cash receipts. So when this transaction is recorded,
Accounts Receivable and Cash are the accounts that are affected. 

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 Accruals and Reversals
Accruals:

There are two commonly used methods of accounting - Cash Basis and the Accruals Basis.  In cash basis
of accounting income is recognized in books when it is received in cash, and expenses are offset when
they are actually paid.

Contrary to Cash Basis Accounting, in Accrual Basis Accounting, financial items are accounted when
they are earned and deductions are claimed when expenses are incurred, irrespective of the actual cash
flow. Accrual accounting method measures the financial performance of a company by recognizing
accounting events regardless of when corresponding cash transactions occur. Accrual follows the
matching principle in which the revenues are matched (or offset) to expenses in the accounting period in
which the transaction occurs rather than when payment is made (or received).

Accrual accounting is considered to be the standard accounting practice for most companies and is the
most widely used accounting method in the automated accounting system. This method provides a more
accurate picture of the company's current condition, but as all income and expenses need to be recognized
based on their occurrence and matching, it is relatively complex when compared to cash accounting,
which recognizes transactions only when there is an exchange of cash. The need for this method arose out
of the increasing complexity of business transactions and investor demand for more timely and accurate
financial information.

To help you understand this concept let’s look at an example. A company has sold merchandise on credit
to a customer who is credit worthy and there is absolute certainty that the payment will be received in the
future. The company earns a profit of $500 on the total sales price of $2000. The accounting for this
transaction will be different in the two methods. The revenue generated by the sale of the merchandise
will only be recognized by the cash method when the money is received by the company which might
happen next month or next year.  However in the Accrual Method the revenue will be recognized in the
same period, an “Accounts Receivable” will be created to track future credit payments from the customer.

Based on the above discussion now let’s take a look at some accrual/deferral related concepts:

 Accrued revenue is an asset, such as unpaid proceeds from a delivery of goods or services, when
such income is earned and a related revenue item is recognized, while cash is to be received in a latter
period.
 Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the
uncertainty is not significant enough to qualify it as a provision.

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 As an accounting practice expense and revenue accruals are reversed in the next accounting
period to prevent double booking of expenses/revenues when they gets settled in cash.

Reversals:

At the beginning of each accounting period, there is an accounting practice to use reversing entries to
cancel out the adjusting/accrual entries that were made to accrue revenues and expenses at the end of the
previous accounting period. Use of Reversing Entries makes it easier to record subsequent transactions by
eliminating the possibility of duplication.

 Reversing entries are made on the first day of an accounting period in order to offset adjusting
accrual/provision entries made in the previous accounting period.
 Reversing entries are used to avoid the double booking of revenues or expenses when the
accruals/provisions are settled in cash.
 A reversing entry is linked to the original adjusting entry and is written by reversing the position
of debits with credits and vice versa.
 Net impact of Original Entry and Reversing Entry on the accounting books is always zero.
 In Automated Accounting Systems, it is not possible to delete transactions once the posting has
been made. In such systems reversals is the recommended way to correct the erroneous entries.  An
example is that one interface feed has been posted by mistake twice. This has inflated many income
expense accounts. A reversing entry with opposite debit and credit amounts to all the impacted accounts
will nullify the impact of the mistake.

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Accrued Expenses or Accrued Liabilities
What are Accrued Expenses?

Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but
have not been recorded in the accounts. Accrued expenses are expenses that has already been incurred,
that the resulting benefit has been received by the business and we have a legal or moral obligation to pay
the other party, but not yet paid or recorded. Examples of these types of adjusting entries could be for
payroll that has been earned by employees on the last day of the period but not paid until the next payroll
date. Other examples include accrued interest on notes payable and accrued taxes.

What is Accrued Liability?

Accrued liability is a liability that was incurred, but for which payment is not yet made, during a given
accounting period. Some examples include wages owed and taxes payable. Accrued payroll is an example
of accrued expense/liabilities – usually represented in a separate account, which represents the amount
earned by employees but not yet paid to them. Since employees are typically paid for time already
worked, not in advance, every company has some amount of compensation earned by its employees but
not yet paid to them. The only exception would be those companies that pay employees on the last day of
their workweek, in which case at the end of a payday they would not owe any money to their employees,
until the following day.

Why record accrued expenses and liabilities?

When a company keeps its accounting records on the accrual basis, such liabilities are recorded when they
become owed, even though they don't actually have to be paid until later on. The amount of such an
accrued but unpaid item at the end of the accounting period is both an expense and a liability.

These may be expenses the company has incurred, but for which it has not yet received an invoice to
record. In order to make sure the expense gets recorded into the right accounting period, the company's
accountants will accrue the liability rather than wait for an invoice to arrive or a check to be issued.
Examples might include large purchases for which the supplier has not yet invoiced the company or
interest expense on a loan that doesn't get invoiced, but for which the bank will automatically charge the
company. This adjusting entry is necessary so that expenses are properly matched to the period in which
they were incurred.

For Example:
A company gets into an agreement to borrow $2 million from an investment company for six months
payable along with interest @2% per month, after six months. The loan was advanced on November, 1
and the company follows the regular accounting calendar from Jan to Dec every year. The amount was
repaid on 1stMay along with an interest of $240000.

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As the company closes it books for the accounting year on December 31, on that date the company will
not have an invoice or payment for the interest that the company is incurring. (The reason is that all of the
interest will be due on 1st May next year). Without an adjusting entry to accrue the interest expense that the
company has incurred for the two months November and December, the company’s financial statements
as of December 31 will not be reporting the $80,000 of interest (Interest @2% for 2 months) that the
company has incurred in December. In order for the financial statements to be correct on the accrual basis
of accounting, the accountant needs to record an adjusting entry dated as of December 31. The adjusting
entry will consist of a debit of $80,000 to Interest Expense Account (Expense Accrual) and a credit of
$80,000 to Interest Payable (Liability Accrual).

What happens to these entries when amounts are paid?

These types of accrual entries generally reverse the next month. To simplify the subsequent recording of
the following period’s transactions, some accountants use what is known as reversing entries for certain
types of adjustments. Reversing entries can be automated in ERPs and discussed and illustrated in a
separate article in this section.

Why accrued expenses result in adjusting entry?

Accrued revenues and expenses are created by unrecorded revenue that has been earned or an unrecorded
expense that has been incurred. As the cash outlay has not happened in both these cases, we need to pass
an adjustment entry at the end of the accounting period to record these expenses into books of accounts.
Prior to recording the adjusting entries, neither accrued revenues nor accrued expenses would have been
recorded.

When to convert commitments to Accrued Liability?

Expenses do not get recorded when they are committed, when the order is called in, when a purchase
order is issued, or even when the supplier agrees to supply the goods or services ordered. All those things
are simply requests or promises, all of which can be rescinded without penalty. So they're not the
irrevocable transactions that we can record. When the supplier acts on that promise to deliver, then we
have an accounting event that should be recorded and the money is really spent.

Today, many companies have integrated enterprise accounting systems that can keep track of purchase
orders issued but not yet fulfilled, and it's much easier to track and report commitments made for future
goods and services. Even so, such commitments cannot be booked as actual expenses until the goods have
been delivered and the purchase order satisfied. With that overview in mind, under accrual systems
accountants need to book expenses that have already been incurred.

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Accrued Revenue or Accrued Assets or
Unbilled Revenue
What is Accrued Revenue?

Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the
customer or posted to the general ledger. Accrued revenue is treated as an asset on the balance sheet rather
than a liability. Accrued revenue refers to revenue that has been incurred but not yet received. It is a
temporary debt to the business that has provided the product or service. Examples of accrued revenue
items might be services or products you have provided but that have not yet been billed or paid for. This
outstanding amount is usually displayed under the label of current assets on the company balance sheet.
Accrued revenue becomes unbilled revenue once recognized as unbilled revenue is the revenue which had
been recognized but which had not been billed to the purchaser(s).

The amount of the accrued income will also result in a corresponding increase in the entity’s retained
earnings account as the accrued revenue adjusting entry also includes a credit to the revenue account.

Which industries generally use Accrued Revenue?

The service industries account for a large number of accrued revenue transactions, since quite often
services are provided over a week, month, or even year, but aren't billed until the job is complete.

In the financial services industry, payment is typically based on a particular action, such as creating an
account, transferring funds, notarizing a document or offering advice. It is very common for some fees to
be billed to clients after the services have been completed, so there is a delay between the service and the
payment that leads to accrued revenue.

In case of software companies, they work under fixed price contracts where the payments are based on
different milestones. Where the work has been completed and milestone has not been yet reached, accrued
or unbilled revenue exists. Simply put, this pertains to work completed for which a bill has not yet been
issued to clients for example the milestone is the Go Live Date of the system, the code has been developed
and work of the software company is over but the client has not yet moved the code to production system.

Accrued revenue is also significant for the construction industry where ~90% of the work is done on credit
and payments which come over a period of time. Percentage-of-completion method is preferred method
for construction industry whenever the estimates of costs to complete the work can be reasonably made
and are dependable. Besides the construction industry, accrued revenue also plays a big role in the rental
industry, where unclaimed bills are grouped under accrued revenue.

Utility revenues, derived primarily by providing utility services to consumer like telephone, electricity,
gas pipelines, are recognized when the service is delivered to and received by the customer. Revenues

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 include accruals services delivered but not yet billed to customers based on estimates of deliveries
(accrued unbilled revenues).

Examples of Accrued Revenues:

1. An example of accrued revenue is fees for services that an attorney has provided but hasn’t billed
to the client at the end of the period. Other examples include unbilled commissions by a travel agent,
accrued interest on notes receivable, and accrued rent on property rented to others.
2. Another example of accrued revenue would be for a custom ordered machine that has been
shipped FOB shipping point but the approval to bill the customer has not been received by the billing
clerk. An adjusting entry would be recorded to recognize the revenue in the correct period. This entry will
reverse when the customer is appropriately invoiced.
3. In case of a landscaping company that has performed work on a lawn for half a month; the
company may delay the billing to the customer, accruing it until the client can be billed for a full month of
work instead. This gives rise to accrued revenue for the unbilled period.

What are some of the benefits of tracking accrued revenue?

Keeping track of accrued revenue is most important in service-industry businesses that often supply
products or services before payment is received. Allowing customers to receive products or services and
pay for them later can help increase sales by enticing customers who want to get a product or service but
may not have the cash on hand. It can also help businesses that deal with large service contracts by
allowing the customer to pay for the service gradually. One disadvantage to allowing this type of
arrangement is that the business has incurred the cost of the service before it receives money for the
service, which can increase the risk of non-payment until the debt is paid.

Accrued revenue figures are most useful when trying to get a fair valuation of the business, as it can help
raise the value of a business that has made sales that have not been paid for. This reporting is very
important to the valuation of a company, where billing typically occurs after the work or service is
complete. Without this asset class on financial reports, the service companies could appear to have much
lower revenues, and may not have a fair method to balance expenses associated with the accrued revenue.
Accrued revenues are assets that unless properly accounted for, will not provide an accurate picture on the
balance sheet for a business in case of these industries.

What is the accounting treatment for accrued revenue? Is it an established practice?

From an accounting perspective, the practice of accounting for unbilled revenue is an accepted practice,
where the nature of the industry demands recording income that is not billed, on an accruals basis.

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For example, the software company would carry out work under a contract which specifies payments
based on milestone billing dates that fall shortly after accounting periods. In such instances, the firm
would include the revenues in the profit & loss account while declaring accounting results, with a
corresponding debit to unbilled revenues in the balance sheet, even though the invoice on the client can be
raised only at a later date. The unbilled revenue disclosed as a separate line item in the balance sheet by
software companies is a monetary asset similar to accounts receivable, except that the right to receive cash
may not have been established through billing as on the balance sheet date.

What is the difference between accrued revenue and accounts receivable?

Accrued revenue and debtors are similar as both of them are current assets but they are different financial
terms signifying an important business reality. In both cases, journal entry is closely related, the revenue is
earned before the actual cash have been received, and they represent a resource owned by the entity,
which will bring a future economic benefit in the near foreseeable future. They are also different in a
subtle but significant way

In case of accounts receivable, the customer has already been delivered goods or services and also the
invoice specifying the amount due from the customer, hence a credit sale has occurred, there is a
contractual obligation on the customer to pay on due date and a debtor should be recognized in the books
as per the accrual concept. However, in the case of accrued unbilled revenue, the customer has been
delivered goods or services, either in full or part; however the invoice for the same, obligating payment
from customer has not been raised yet. On the day of closing the books there is no obligation on the
customer to pay that amount, however there exists a reasonable certainty that the customer will be billed
and such future invoice will be paid in the due course of time under the normal business cycle.

Recognition of this accrued unbilled income adds to the revenue reported in the income statement, and
also results in a corresponding asset on the balance sheet. Future cash collection reduces this asset
created in the balance sheet but doesn’t affect accrued revenue recognized in the income statement.

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Adjusting Entries
The Adjusting Process:

At the end of an accounting period, many of the balances of accounts in the ledger can be reported as they
have been summarized in the general ledger system, without any changes, and financial statements can be
generated for them. For example, the balances of the cash and land accounts are normally the amount
reported on the balance sheet because we cash reflected in the balance sheet should be equal to the
physical cash in hand and land is generally carried in the books at historic cost.

Under the accrual basis, however, some accounts in the general ledger require updating (adjustment). For
example, the balances listed for expenses that have been paid in advance like the advance rental for the
lease period, are normally overstated because the use of these assets is not recorded on a day-to-day basis.
The balance of the supplies account usually represents the cost of supplies at the beginning of the period
plus the cost of supplies acquired during the period. To record the daily use of supplies would require
many entries with small amounts. In addition, the total amount of supplies is small relative to other assets,
and managers usually do not require day-to-day information about supplies.

This analysis and resulting updating of accounts at the end of the accounting period before the financial
statements are prepared is called the adjusting process.

The Adjusting Entries:

The journal entries that bring the accounts up to date at the end of the accounting period are called
adjusting entries. Adjusting entry is an accounting entry made at the end of accounting period to allocate
items between accounting periods. Generally adjusting entries are recorded at the end of accounting period
to adjust ledger accounts for any changes that relate to the current accounting period but have not yet been
recorded.

Not all journal entries recorded at the end of a period are adjusting entries. The main purpose of adjusting
entries is to match revenues and expenses to the current accounting period which is a requirement of the
matching principle of accounting or to reconcile the different books of accounts like management books,
consolidation books and local statutory books by eliminating or adding entries requiring different
treatment as per the different accounting standards or laws.

All adjusting entries generally affect at least one income statement account and one balance sheet account.
Thus, an adjusting entry will always involve revenue or an expense account and an asset or a liability
account.

Types of Adjusting Entries:

Most adjusting entries could be classified in the following four ways:

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1. Prepayments/Deferral:

Cash has been paid or received before the actual consumption. These can be further classified as:

(A) Unearned Revenue: Revenues received in cash before they are earned

(B) Prepaid expenses: Expenses paid in cash before they are used

2. Accruals:

Actual consumption has happened and cash is yet to be received. These can be further classified as:

(A) Accrued Expenses: Expenses incurred not yet paid in cash

(B) Accrued Revenues: Revenues earned not yet received in cash

Prepayments or Deferrals:

Deferrals or prepayments are also a possible source of adjusting entries. There can be both deferred
revenues and deferred expenses. Adjusting entries for prepayments are necessary to account for cash that
has been received prior to delivery of goods or completion of services. A company receiving the cash for
benefits yet to be delivered will have to record the amount in an unearned revenue liability account. Then,
an adjusting entry to recognize the revenue is used as necessary.

If cash or something of value has been received for future products or work to be performed, since the
product hasn't been delivered or the service provided, the income must be deferred to a future date.
Deferred income is recorded as an asset (most likely cash) and a liability (deferred revenue). Prepaid rent
received by a landlord is an example of a deferral.

Similarly, Expenses can also be deferred. For example, if your company pays its insurance bill in advance
for a period covering the next three years, only the amount attributed to this period’s insurance coverage
would be an expense, while the remainder of the payment would be classified as a deferred expense. In
this case, an asset called prepaid insurance would be established for the insurance paid representing future
coverage.

In case of advance payments, when the cash is paid, it is first recorded in a prepaid expense asset account;
the account is to be expensed either with the passage of time (e.g. rent, insurance) or through use and
consumption (e.g. supplies).

Accruals:

Similarly on the other hand an organization might have received services or products but has not paid
them in cash or has provided services or products to its customers but not received the sales proceeds in
cash. In both these cases these accruals will result in adjusting entries. For example, there may be interest
owed on debt or salaries owed but not yet paid to employees. Calculations must be done to determine
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 those expense accruals—both an expense and a liability that are building over time. Revenue accruals are
also possible. For example, interest may be accruing on an entity's investments and therefore an interest
income accrual would need to be recognized that would have the effect of increasing assets (interest
receivable) and increasing revenue (interest income). There are many types of accruals that may need to
he recognized through a series of adjustments at the end of a period.

Adjusted Trial Balance:

An Adjusted Trial Balance is a list of the balances of ledgers which is made after the adjusting entries are
done. Adjusted trial balance contains balances of revenues and expenses along with those of assets,
liabilities and equities after the changes occur due to adjusting entries.

Adjusting Entries –Summary:

Based on the above discussion now let’s take a look at some accrual/deferral related concepts:

 Deferred income is recorded as an asset (most likely cash) and a liability (deferred revenue).
 In case of advance payments, when the cash is paid, it is first recorded in a prepaid expense asset
account; the account is to be expensed either with the passage of time
 Accrued revenue is an asset, such as unpaid proceeds from a delivery of goods or services, when
such income is earned and a related revenue item is recognized, while cash is to be received in a latter
period.
 Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the
uncertainty is not significant enough to qualify it as a provision.
 As an accounting practice expense and revenue accruals are reversed in the next accounting
period to prevent double booking of expenses/revenues when they gets settled in cash.

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Adjustment Period
What is Adjustment Period?

Any accounting period created specifically for entering adjustment and closing entries is known as
adjustment period. The dates in the adjustment period overlap with the normal accounting periods in
automated systems. Organizations create one accounting period as "Year Open Period” which is the first
period in the accounting calendar to clear “carried over balances” from last financial year. Similarly
accountants may define the last period of the accounting calendar as "Year Close Period" where
adjustment transactions and closing entries are posted for the current accounting calendar. These periods
are generally known as “Adjustment Periods”, sometimes are also referred to as “Zero Periods”.  Most
ERP’s and automated general ledger systems provide the functionality to define adjustment periods.

Benefits of Adjustment Periods:

Opening Adjustment Period: Adjustment period at the beginning of the year helps tracks opening
balances and transactions. At the beginning of the year user can create journals to transfer their opening
balances for the current accounting year. Generally there is an time overlap between the opening of the
new financial year and finalization of audit of the previous year. This results in creation of many
adjustment entries in the previous year that has an impact on the opening balances of the current year.
Users are able to capture those adjustments in a separate “opening adjustment period” to keep a complete
track of their normal and adjustment entries. The starting period “Zero” is used to store the starting
balance for each balance sheet account. 

Closing Adjustment Period: Similarly, defining an adjustment period at the close of the year helps track
closing balances and adjustment transactions. Multiple closing periods allow generation of financial
statements reflecting various stages of closing and are helpful in providing complete audit trail.  This also
helps controlling any back dated entries in the main accounting periods.

Tracking of Errors & Omissions: Errors and Omissions discovered after the year close can be corrected
by passing relevant entries in the Adjustment Period. This will not impact your reported balances;
however will create an audit trail for the transactions that need to be take care of next year.

Stat to Management Reconciliation: Adjustment Period can also be used to track reconciliation entries.
Large corporations need to pass many reconciliation entries to tally their Statutory and Main
Consolidation Books. Adjustment period is useful in tracking the entries made to reconcile the
consolidation books with the Local Country Books.

Exclusion for Management Reporting: After the close of the books, a large number of entries like
accounting entries for accrual or provisions need to be made in the accounting books to comply with the
accounting standards and legal regulations. Management however is generally interested in operational
data to do their planning and forecasting activities. By limiting adjustment and statutory entries to

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 adjustment period management reports can be driven from same accounting books by excluding
adjustment periods from the reports.

Challenges of using Adjustment Periods:

Adjustment periods have some inherent challenges which have been discussed below:

 Automated Accounting Packages comes with many standard reports. You might need to evaluate
the impact of adjustment periods on these reports.
 While reversing journal entries; users need to take precaution to select the period in which they
want the reversals to happen. ERPs by default might select the adjustment period.
 You may need to decide whether adjustment period should be included or excluded in your
comparative reports.
 Similarly you may need to decide whether adjustment period need to be included in any
management reports, especially the ones that can be compared with your statutory published results.

How to track adjustment entries without adjustment period?

Defining adjustment periods is totally optional and decision must be based on company’s requirement on
the factors discussed above. Alternate solution to defining adjustment periods could be to define a separate
cost center (department, division, profit center etc.). All year-end adjustment entries are made using this
cost center and this unit is included for statutory consolidation but excluded for management reporting.

Diagram: Figure given at bottom gives a pictorial representation of a calendar with 13 effective periods
having one adjustment period at the year end. While reporting your financial results you need to include
your beginning of the year adjustment period with the first calendar period and your last adjustment period
with the last reporting period.

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Advanced General Ledger Concepts
Enterprise General Ledger Systems:

A general ledger is the heart of a financial system, every company that needs to manage its financials
needs one. It is primary tool for recording the company's business transactions, calculating its profit or
loss, and tracking its assets, liabilities, and owner's equity. Understanding and implementing built in
advanced features and controls can drive business and accounting processes leading to more accurate
accounting with less manual intervention.

The modern general ledger systems that support corporations today are not the columnar ledgers of our
ancestors. They are robust and provide in-depth insight into an organization—only if one can figure out
what they do and how to do it. Users of these modern enterprise suites often feel frustrated by the lack of
information surrounding specific functionality or features. This article will introduce the learner to
concepts that are commonly used by most of them and in the subsequent articles we will expand on each
of these concepts.

Given below are some of the advanced, general ledger concepts, understanding of which is must for any
user of modern general ledger systems.

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

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12.Trial Balance

13.Income Statement

14.Balance Sheet

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 Allocations
What is Allocation?

Allocation is the act of distributing according to a plan. As per the dictionary allocate means to set apart
for a special purpose; designate; distribute according to a plan. From an accounting context it means a
system of dividing overhead expenses between the various departments of a business. Figuratively,
earmarked is often used in regard to monetary allocations although it is heard in other contexts as well.

Allocation also refers to a piece of the pie, a share in the profits, a portion of whatever is being divided up
and parceled out usually money, but in accounting context is applicable to account balances. This
expression probably has its origin in the graphic representation of budget allotments in circular, pie-
shaped form, with various sized wedges or pieces indicating the relative size of allocations to different
agencies, departments, etc.

Mass Allocations:

Mass allocations is a functionality offered by many automated systems and ERPs to distribute the account
balances from one account to several others based on formula or mathematic logic. Users can define a
Mass Allocation formula to create journals that allocate revenues and expenses across a group of cost
centers, departments, divisions, locations and so on using any accounting dimension available. Users can
include parent values in allocation formulas that can enable allocating to the child values referenced by the
parent without having to enumerate each child separately.

Types of Allocations:

The commonly used allocations can be grouped as following:

 Net Allocations: allocated amounts that reflect changes to the cost pool.
 Step–Down Allocations:  distributing amounts from one allocation pool to a subsidiary allocation
pool.
 Rate–Based Allocations: using current, historical or estimated rates to allocate costs.
 Usage–Based Allocations: using statistics such as headcount, units sold, square footage, number
of deliveries or computer time consumed to calculate allocation amounts.
 Standard Costing Allocations: using statistics such as sales units, production units, number of
deliveries or customers served to perform standard costing.

Examples of Allocation:

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 Allocations can be used in various practical business situations. For example consolidated rent paid can be
allocated to another division based on area of usage, or, a pool of marketing costs can be allocated to
several departments based on the ratio of department revenues to total revenues. Some of the commonly
used examples are:

 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
 Distributing marketing costs to product lines based on revenue
 Distributing common employee expenses to employee cost for assessments

In the example shown in the figure, 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.

Difference between Allocations & Recurring Journals:

Recurring Journals are for transactions that repeat every accounting period and allocation Journals are for
single journal entry using an accounting or mathematical formula to allocate revenues and expenses across
a group of accounting dimensions like cost centers, departments, divisions, locations or product lines
depending upon usage factors.

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Chart of Accounts
What is Chart of Accounts?

A chart of accounts (COA) is list of the accounts used by a business entity to record and categorize
financial transactions. COA is used to organize the finances of the entity and to segregate expenditures,
revenue, assets and liabilities in order to give interested parties a better understanding of the financial
health of the entity.

The chart of accounts is a list of all the accounts and their numbers contained in the general ledger. The
accounts are listed in the order of assets, liabilities, owner's equity, revenue, and expenses. Transactions
can be posted to each defined account in COA and it can capture balances in general ledger Chart of
accounts is a way to outline the accounting system of a business, the chart of accounts establishes how the
business will operate, what information will be captured, and what information will subsequently be
readily retrievable by the system for reporting and other needs.

Is Chart of Accounts worth discussing? Does it really matter?

Have you ever wondered after hearing such phrases from accountants like "It's not in the chart of
accounts. We don't know how to enter your transaction" or "We can't process your invoice without an
account number."  In case of new general ledger implementations nothing moves forward unless chart of
account has been finalized.

While to many non-financial managers and also to new IT implementers increased focus on chart of
accounts seem unwarranted and it appears that the client is unnecessarily slowing down the project by
discussing chart of accounts too much. That's not really their purpose—and everyone who has worked in
an IT project involving general ledger knows that this structure needs to be finalized first before other
discussions can start and that too because it has a serious impact on the entire general ledger design.

Why we need Chart of Accounts?

The entire recording process of any accounting system requires a basic organization of data so that the
accounting data can be clubbed into meaningful accounts and represented in a way useful for the users and
stakeholders. For example – purchases on credit from vendors through invoices can be later summarized
and reported with some clarity as to what was purchased, why it was purchased, what organization(s)
benefited from those expenditures, and what is the unpaid liability on account of all those purchases. That
basic organization is called a chart of accounts.

You might think of the organizing system for your company's accounting data as a collection of buckets,
or accounts, each with a particular kind of data inside. There might be a bucket for each ledger account
names and associated numbers used by a company, arranged in the order in which they normally appear in
financial statements—Assets, Liabilities, Owners' Equity or Stockholders' Equity, Revenue, and Expenses.

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For management analysis there will also be a bucket for each product or service the company sells and one
for each type of department or cost center where those expenses might incur as it sells its products or
services. The chart of accounts is an organized, comprehensive list of all those buckets. The buckets, in
turn, are labeled with their appropriate account number and arranged by the kind of data they hold, so that
accountants can quickly find the right bucket in which to store the latest piece of data about a particular
accounting transaction. These buckets are then arranged and rearranged during the accounting process and
their contents are counted and checked to produce reports that summarize the data they contain.

Purpose of Chart of Accounts:

The General Ledger is used to record and store each individual account and their transactions. The Chart
of Accounts is the basis of any accounting system. The purpose of the Chart of Accounts is to classify
each financial transaction and record it with reference to appropriate business dimension enabling the
users to select or extract the financial data through account inquiry screens or reports. Finally enabling
reporting on (or enquire about) the sum total of financial transactions at various levels on the chart.  

Adding more dimensions to Chart of Accounts:

In ERP’s COA’s are captured using a defined segmented structure. Segmented COA Structure enables a
business entity to record other accounting dimensions pertaining to financial transaction.

Modern organizations are complex generally consisting of many different lines of business; operating in
different geographies, dealing in multiple products and services, running different projects and moving
resources and employees across these functions. The "chart of accounts” must reflect these complexities to
enable effective management and external reporting. An effective chart of accounts structure can track
revenue and expenses appropriately for different business dimensions like departments, geographies,
product lines etc. and can provide accurate analysis for decision making, and for reporting to government
agencies, sponsors, and stakeholders.

What is Chart of Accounts Segment?

In automated accounting systems and ERPs, chart of accounts are made up of and represented as a string
of numeric and alphanumeric fields that act as identifiers. The companies define different segments to
capture relevant business dimension along with the natural account associated with the transaction.
Companies may define anywhere from one to dozen segments to make up their Chart of Accounts and
capture granular level business information associated with the transaction.

Examples of accounting dimensions are Company, Cost Center, Department, Product etc. Figure below
shows an example of the Segmented Chart of Accounts Structure using some of the commonly used
business dimensions.

Thorough planning and evaluation of financial needs is perquisite to designing a good COA Structure. We
have created separate tutorial on GL Accounts that helps you understand the concept of Natural Accounts
and some key GL Accounts. There is a full tutorial on the understanding COA in detail and best practices
to define an effective COA Structure.

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Currency
What is Currency?

Currency is the generally accepted form of money which is issued by a government and circulated within
an economy. Currency is used as a medium of exchange for goods and services. Every nation has its own
currency and global trade results in exchange of currencies of different countries. Currency is the basis for
trade and when the trade involves two different countries, generally two different currencies come to play.
To obtain another country’s currency, it is necessary to buy it using the appropriate exchange rate and the
price of a currency compared to another is called the exchange rate.

What is Exchange Rate?

Exchange Rate is the price of one country's currency expressed in terms of another country's currency.

In other words, the rate at which one currency can be bought or exchanged for another currency. For
example, the higher the exchange rate for one Euro in terms of one Dollar, the lower is the relative value
of the Dollar. 

Exchange rates are determined by the foreign exchange market, where continuous trading happens
between a wide range of different types of buyers and sellers. There are different types of rates that get
referenced with respect to General Ledger. The Spot Exchange Rate refers to the current exchange rate.
The Forward Exchange Rate refers to an exchange rate that is quoted and traded 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?

Accounting Currency is the monetary unit used while recording transactions in company's financial
books. The accounting currency may not necessarily be same as the currency used by the customers when
conducting the transaction. Multinational companies are likely to use their home country's currency when
recording transactions, even if the sale was denominated in a foreign currency.

For example, a American firm conducting business in Japan will likely use the Dollar as the accounting
currency, even if sales transactions are conducted using the yen. American company is under legal
obligation to consolidate its accounts for the operations all over the world in US Dollar for reporting its
results in US. Hence for its US consolidation books it will always account for in the US Dollar.

What is Functional Currency?

Functional Currency 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.
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SFAS 52 introduced the concept of functional currency, defined as "the currency of the primary economic
environment in which the entity operates; normally, that is, the currency of the environment in which an
entity primarily generates and expends cash."

To understand this learner need to understand the context in which the functional currency term is being
used. The functional currency term is generally used in the context of an entity. It is the main currency of
the economic environment in which the entity operates. Hence if an US Corporation, registered in US, is
operating in India as a separate registered Indian legal entity, then the functional currency for the Indian
legal entity will be INR as that is the currency of the main economic environment. However if the parent
entity drives its 90% of revenues from operations in US then the functional currency for the parent entity
still remains US Dollar.

As a general practice, functional currency is used as accounting currency for the respective legal entity.
The main reason is that many countries have laws and standards that sometimes prescribe the accounting
books to be maintained in the functional currency for local statutory reporting needs.

Businesses may enter into transactions (sales, payments, etc.) in multiple currencies. Each legal business
entity of the business translates these items to its functional currency at an appropriate exchange rate. It
then prepares periodic reports of its position (balance sheet) and activity (income and cash flow
statements) in that functional currency. When various legal entities are combined, these reports are
translated and consolidated to become financial statements. The translation and consolidation need to
happen in the functional currency of the parent entity.

What is Transacting Currency?

Transacting Currency is the currency which customers see and deal with when conducting a transaction,
such as a sale. The accounting currency may not necessarily be same as the transacting currency.
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?

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From a functional and business perspective Foreign Currency is the currency of another country. From
accounting 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
for that entity.

What is Basic Currency?

Some accountants use the term basic currency or base currency. They are generally referring to the
accounting currency. The amounts referring to different currencies cannot be totaled directly. It is
necessary to have a basic currency to refer to and to use for the totals. The main point of accounting is that
the totals of the “debit” balances must correspond to the totals of the “credit” balances. To verify that the
accounting is balanced, there must be a single currency with which to do the totals. If there are different
currencies, the basic currency must be indicated before anything else. This basic currency becomes the
accounting currency for recording transactions.

What is Account Currency?

Most of the automated accounting systems provide the functionality to record both the transacting
currency balances as well as accounting currency balances side by side against each transaction. Uses can
enter the transactions in foreign currency and they are translated using the daily exchange rate to the
accounting currency. Users can associate a currency with an account to specify the currency in which all
transactions pertaining to that account will be entered. For example you have some foreign currency
deposits with the bank. You may specify that currency to prevent errors in your deposit account. In that
case such accounts will have its own currency symbol which indicates in which currency the account will
be administered. 

Once the user indicate what the currency of the account will be, such accounts will then have their own
balance expressed in their own currency. Only entries in the specified currency will be permitted on such
accounts. If the account is in Euro, then there can only be Euro entries on such account; if the account is in
USD, then there can only be entries in the specified USD currency on that account.

For each account, alongside the balance in the account’s own currency, the balance in accounting currency
will also be kept, in order to calculate the trial balance in accounting currency.

Multi-Currency Concepts
For companies or accounting users managing multiple currencies, the interplay of foreign exchange rates
and conversions can make the maintenance of the books a complicated task. Translation of statements
may result in translation differences, which are accounted for as a cumulative translation adjustment.
Businesses using the accrual method of accounting may recognize revenue or expense in one period and
receive or pay it in another. In the intervening period the exchange rate may have changed. When an
accrued item is settled, the difference due to exchange rate movement in the amount accrued and the
amount settled is treated as foreign exchange gain or loss.

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Applicability of multi-currency creates a need to understand some foreign currency concepts like
conversion, translation, revaluation and currency exchange gain & loss. These concepts have been covered
in our tutorial on Multi-Currency Concepts.

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Example of Subsidiary Ledgers
Subsidiary Ledgers help manage and store specific information regarding each of the control accounts in
your GL. Companies create subsidiary ledgers whenever they need to monitor the individual components
of a controlling general ledger account. 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.

Commonly Used Subsidiary Ledgers:

Some commonly used subsidiary ledgers are accounts receivable subsidiary ledger, accounts payable
subsidiary ledger or creditors' subsidiary ledger, inventory subsidiary ledger, fixed assets or property or
plant & equipment subsidiary ledger, projects subsidiary ledger, work in progress subsidiary ledger and
cash receipts or payments subsidiary ledger.

1. Accounts Receivable Subsidiary Ledger:

The accounts receivable subsidiary ledger is essential to most businesses and 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. It is also known as Customers Sub-Ledger
or just AR Sub-Ledger. Companies may have hundreds or even thousands of customers who purchase
items on credit, who make one or more payments for those items, and who sometimes return items or
purchase additional items before they finish paying for prior purchases. Different customers may be
subject to different credit terms and an organization might need to track these terms to raise reminders or
due date invoices.

Recording all credit sales, sales returns, and part or subsequent payments in a single account would make
it virtually impossible to calculate an individual customer's balance, because the customer's transactions
would be interspersed among thousands of other transactions belonging to different customers. Accounts
receivable subsidiary ledger provides quick access to each customer's balance and account activity.

Companies maintain a list of invoices due from their customers, normally in the form of an accounts
receivable aging register.  This provides them with a listing of all the outstanding and unpaid invoices due
from their customers.  It also lets them know how old the invoices are, so they are aware of any past due
items.

Balance in the “Account Receivable Control Account” in general ledger will represent total amount receivable from
all the customers on a given date. In ERP context it is known as Accounts Receivable (AR) Module.

2. Accounts Payable Subsidiary Ledger:

Accounts Payable Subsidiary Ledger is used to manage invoices from suppliers and payments to them
against the purchases made. Main transactions are recording of invoices for purchases & managing the

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payments for these invoices. It is also known as Suppliers Subsidiary Ledger or Creditors Subsidiary
Ledger.

Once the PO has been raised and against that material has been received, suppliers will raise invoices on
the company for the payment due to them. Accountants enter individual invoices due to suppliers in the
accounting system for later payment.  Suppliers usually offer the company payment terms, along with
discounts for early payments. Company need to track these payment terms for making effective use of its
cash resources. All these invoices entered into the accounting system that has not yet been paid off make
up the subsidiary ledger for accounts payable. 

Balance in the “Accounts Payable Control Account” in general ledger will represent total amount payable to all the
suppliers/creditors on a given date. In ERP context it is known as Accounts Payable (AP) Module.

3. Inventory Subsidiary Ledger:

Inventory Sub-Ledger, is used to manage the inventory/stock or items that a company buy, sell or
manufacture. Inventory Ledger is also used to manage and track item cost and issue prices and movements
of stock items due to trading transactions. It is also known as “Stock Sub-Ledger” and sometimes referred
to as “Material Ledger”.

From Inventory sub-ledger one can get details of quantity and cost price of any inventory item at any point
in time. Manufactures, Retailers and Wholesalers keep a record of in-stock inventory items so that they
know what is available for sale or as a raw material for subsequent manufacturing process.  This record
normally contains a description of each item, quantity on-hand, the normal selling/issue price, and the cost
of the item. The quantitative record is used periodically to conduct physical verification of the stock and
account for any variances both positive and negative. Sales Returns and Purchase Returns are also
recorded in the inventory sub-ledger.

Balance in the “Inventory Control Account” in general ledger will represent the total cost of all inventory items in
stock with the organization on a given date. In ERP context it is known as Inventory Module.

4. Fixed Assets Subsidiary Ledger:

Fixed Assets Subsidiary Ledger is used to manage purchase, sale, allocation and retirement of fixed assets.
This is also known as “Equipment Subsidiary Ledger” or just the “Asset Register”. It is very important
record for the companies that carry a large amount of depreciable assets, each of which must be
depreciated over a number of years.

The depreciation is recorded for each item in the Fixed Assets Subsidiary Ledger. This sub-ledger can
include information about the acquisition, original cost and disposal of the item, residual value, the
accumulated depreciation, and current book value. Fixed assets include items like equipment, plant and
machinery, office furniture, computer equipment, machinery, buildings, or land. Using Fixed Assets Sub-
Ledger organization can get details of any fixed asset including original cost, current depreciated value,
and location etc. at any point in time.

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Balance in the “Fixed Assets” control account in general ledger will represent the total cost of all assets owner by
the organization on a given date. When all of the depreciation taken is added together, the total should equal the
general ledger balance in accumulated depreciation. In ERP context it is known as Fixed Assets Module.

5. Projects Subsidiary Ledger:

Certain companies like Real Estate Builders and Construction Companies undertake various independent
projects. Many businesses of the same nature sometimes need to isolate and track financial activity
associated with a particular project or event.  They need projects sub-ledger for storing, tracking and
reporting financial activity like capital budgeting, capital expenditure tracking, monitoring costs, isolating
and reporting the labor and overhead costs etc. that helps them understand their operational costs and
profitability. In that case a sub ledger is required for each project.

Projects Sub-Ledger 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 etc. at any point in time.

This approach necessitates reconciliation of the project ledger with the general ledger because certain
project related costs might need to be posted to both the project ledger as well as general ledger and hence
this can be a reconciliation of the project ledger's balances against the main financial ledger, or a
reconciliation of the journals extracted from the financial ledger to those journals posted to the project
ledger. 

Balance in the “Projects Control Account” in general ledger will represent the total cost associated with a particular
project on a given date. In ERP context it is known as Projects Module.

6. Work in Progress Subsidiary Ledger:

Companies using a job costing system use their job cost sheets as a subsidiary ledger for the Work-in-
Process Inventory account.  Construction contractors might also track the costs associated with each unit
under construction separately in a subsidiary ledger. Similarly manufacturers make use of Work-in-
Progress sub-ledger to keep track of the costs associated with work-in-process inventory for several
different products being produced.

When the total costs incurred on all units are added together, the total should balance to the Work-in-Progress
control account in the general ledger. In ERP context it is known as Work in Progress (WIP) Module.

7. Cash Management Subsidiary Ledger

Cash Management subsidiary ledger is used to manage cash and its reconciliation with bank. This ledger
contains all cash receipts and payments, including bank deposits and withdrawals. This sub-ledger is
periodically reconciled with the bank statements to ensure balances match and account for the missing
transactions.

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Maintaining a cash subsidiary ledger helps to reconcile and void payments generated in the accounts
payable sub-ledger, reconcile accounts receivable and other bank transactions, record funds transfers
between bank accounts, and enter cash receipt deposits.

Final Balance in the “Cash Sub-Ledger” will represent the final cash in hand in the general ledger on a given date.
In ERP context it is known as Cash Management Module. In case of automated accounting system this module also
supports automatic reconciliation of cash with bank statements and other integrated external sources which helps in
reducing the volume of transactions requiring reconciliation.

8. Payroll Subsidiary Ledger:

In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and
deductions. In accounting, payroll refers to the amount paid to employees for services they provided
during a certain period of time. The Payroll subsidiary ledger is used to process all types of payroll
transactions for the purpose of computing and paying your salaried employees or time and labor based
contractors. Payroll subsidiary ledger is used to manage both salaries and wages. You can record
calculations & payments made to each of the employee in this sub ledger. The Payroll Sub-ledger captures
the salary cost under different account heads as prescribed by the law based on the timecards submitted by
the employees.

Maintaining payroll subsidiary ledger also facilitates capturing other employee related information like
earnings detail, contribution detail, deduction detail, payments and check detail and timecard detail.

Payroll maintains records for each employee and the consolidated salaries and wages cost is expensed off to the
relevant control accounts in general ledger. Sometimes the cost is expensed to other sub-ledgers, for example in
case of an organization using projects sub-ledger all associated employer burdens are expensed to the relevant
project. Other examples are expensing payroll cost to Cost Accounting, Equipment, and Capital Work in Progress or
Work Order etc. In ERP context it is known as Payroll Module or Payroll Management System.

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 GAAP to STAT (Statutory) Adjustments
Why do we have different Standards?

All companies keep track of their financial results through accounting using the general ledger. However,
during the process, there are several different methods of accounting that these companies can use, and
usage of these methods can result in different accounting treatment for the same transaction. Cash and
Accrual are two fundamental accounting methods.

Leveraging the fundamental principles of accounting, different bodies prescribe some standards that need
to be followed by organizations coming under their authority. The Financial Accounting Standards Board
(FASB) is the authoritative body having the primary responsibility for developing accounting principles.
The FASB publishes Statements of Financial Accounting Standards as well as Interpretations of these
Standards.

Apart from “Financial Accounting Standards Board” (FASB), the American Institute of Certified Public
Accountants (AICPA), and the Securities and Exchange Commission (SEC) along with the statutory
authoritative bodies of various countries (Example – Institute of Chartered Accountants of India, for
India), all have all played an influential role in developing generally accepted accounting principles which
span across boundaries of nation and have global acceptability. Efforts are still going on to emerge
globally accepted principles, as we still found variations in principles from countries to countries as well
as from businesses to businesses that warrants a need to have different accounting methods.

Companies following under jurisdiction of different geographies may have to follow standards prescribed
by different bodies. For example, all companies that are registered in the United States of America need to
follow US GAAP, and if, these counties are operating in different countries, they need to follow the
accounting standards prescribed by the governments of that particular country for the legal entities
registered in these foreign countries.

What are these Standards?

Two of the most commonly accounting methods that businesses employ are the Generally Accepted
Accounting Principles and the STAT (Local Statutory Accounting Principles). To convert from one
standard to another method, a business must make certain adjustments to its financial statements. Given
below are some of the commonly used standards:

1. US GAAP (US Generally Accepted Accounting Principles)

2. Local GAAP (Local Generally Accepted Accounting Principles)
3. IFRS (International Financial Reporting Standards)
4. Tax Standards & Other Industry Specific Standards
5. STAT (Local Statutory Accounting Principles)

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6. SAP (Statutory Accounting Principles)

Method1: What is USGAAP?

In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and
report financial statements for a wide variety of entities, including publicly traded and privately held
companies, non-profit organizations, and governments. The term is usually confined to the United States;
hence it is commonly abbreviated as US GAAP.

US GAAP is not written in law, although the U.S. Securities and Exchange Commission (SEC) require
that it be followed in financial reporting by all publicly traded companies. The Financial Accounting
Standards Board (FASB) is the highest authority in establishing generally accepted accounting principles
for public and private companies, as well as non-profit entities. All companies registered with US SEC
have to comply and present their financial statements as per USGAAP.

Method2: What is Local GAAP?

Generally Accepted Accounting Principles encompass the entire industry of accounting, and not only the
United States. As US Government has notified standards for US companies, similarly most of the
countries have established and notified accounting standards and principles that need to be adhered to and
complied with all organizations operating within jurisdiction of respective countries. Generally Accepted
Accounting Principles (GAAP) refer to the standard framework of guidelines for financial accounting
used in any given jurisdiction; generally known as accounting standards. Local GAAP includes the
standards, conventions, and rules accountants follow in recording and summarizing, and in the preparation
of financial statements, where the word local refers to and can be replaced by the respective authority or
jurisdiction. For example - A US company operating in other countries need to comply with respective
Local GAAPs for operations in respective countries and need to report its consolidated results in US
GAAP.

Method3: What is IFRS?

International Financial Reporting Standards (IFRS) are principles-based standards, interpretations and the
framework adopted by the International Accounting Standards Board (IASB). They are also known by the
older name of International Accounting Standards (IAS) and they aim for international accounting
standards that can be adopted by all organizations worldwide.

Among other standards, IFRS is best positioned to be a global standard. Local and US GAAPs are slowly
being phased out in favor of the International Financial Reporting Standards as the global business
becomes more pervasive. US GAAP applies only to United States financial reporting and thus an
American company reporting under US GAAP might show different results if it was compared to a British
company that uses the International Standards or Local UK GAAP. While there is tremendous similarity
between GAAP and the international rules, the differences can lead a financial statement user to
incorrectly believe that company A made more money than company B simply because they report using
different rules. The move towards International Standards seeks to eliminate this kind of disparity. At
present, IFRS are used in many parts of the world, including the European Union, India, Hong Kong,
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 Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey. As of August
2008, more than 113 countries around the world require or permit IFRS reporting. It is generally expected
that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by
reducing the costs of comparing alternative investments and increasing the quality of information.
However, this requires a big-picture strategic approach that ensures global consistency in financial
reporting policies and practices.

Method4: What are Tax Standards & Other Industry Specific Standards?

Many governments prescribe different accounting standards for companies operating in a particular
domain. For example US SAP is a set of accounting standards and procedures that insurance companies
use to report their financial data. US GAAP and US SAP procedures differ considerably. State insurance
regulators require insurance companies to keep their accounting records for filing annual financial reports
in accordance with statutory accounting principles (SAP) and the Statutory Accounting Principles (SAP)
forms the basis for preparing the financial statements of insurance companies. As the US insurance
industry falls under state regulation, actual rules vary further by state. Similarly tax laws for various
countries may prescribe different accounting treatments in certain cases that do not match even with the
respective Local GAAPs.

Method 5: What is STAT (Local Statutory Accounting Principles)?

Today organizations are more global than ever and they operate across boundaries of nations. GAAP and
STAT in this context are terms used to define how the results of a multinational corporation will be
recorded and reported for different purposes. In the context of general ledger, GAAP generally refers to
the GAAP prescribed by the home country where the organization’s parent company is registered and has
an obligation to report the consolidated results. The STAT term is generally used to refer to the local
statutory books of accounts to reflect the operations in a specific foreign country for operations in that
country as per the Local GAAP for that specific country.

What are GAAP to STAT adjustments?

As companies need to report results from same business operations using different accounting standards,
they need to make adjustments to their recorded financial data, to convert the financial information
recorded using one accounting method to another. These adjustments entries are in the nature of
permanent adjustments, timing adjustments, reclassifications or eliminations.

Some examples of GAAP to STAT adjustments:

 Under Local GAAP accounting, payments for goods or services may be recorded as expenses
however for US GAAP (full accrual basis) accounting, payments made in this fiscal year for goods and
services that won’t be used until after the end of the year represent purchases of assets, not expenses and
GAAP adjustment is required for the portion of the goods or services that will be used in future years.
This is an example of GAAP to STAT adjustment arising out of a timing difference.
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 SAP applicable for insurance companies operates on different accounting principles to provide
information that is useful under different industry specific circumstances. For example SAP guidelines are
used to prepare financial statements that allow investors to determine the ability of the insurance company
to pay its future claims. In other words, if all customers of the insurance company had a claim at present,
SAP helps to determine if the company would be able to pay those insurance claims. On the other hand,
US GAAP guidelines treat a business as a going concern and therefore, the focus is on preparing the
financial statements by matching revenues with expenses, so an investor can gauge the underlying
profitability of the business for the current year.
 Various tax laws applicable in various countries prescribe different rules for the treatment of
assets for accounting purposes. The depreciation rules are different and there are differences in the way
the residual value can be considered. While most assets have at least some value under GAAP, some
assets might not have any value under the TAX method.

How to make GAP to STAT adjustments:

To adjust a balance sheet from one accounting method to another (for example: GAAP to STAT), an
accountant must identify and adjust the accounting entries that would require a different treatment. From
accounting perspective, there are three distinct stages for this adjustment process, assess individual
situation and requirements, complete the conversion activities, and sustain ongoing reporting.
Organizations need to develop a framework and systems design for accounting, reporting, consolidation
and reconciliation processes and controls. Modern general ledger systems enable accountants to organize
and record accounting data by providing an operating model for multiple financial representations.

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Generally Accepted Accounting Principles
(GAAP)
Why Generally Accepted Accounting Principles?

If every company’s accountants start recording and reporting financial data as they deem fit, without
following some common accounting principles and practices, comparisons among the financial data of the
different companies would become very difficult, if not impossible. Thus, financial accountants follow
generally accepted accounting principles (GAAP) in preparing reports.

Since the purpose of accounting is to convey meaningful and understandable financial information to their
stakeholders, the accounting profession has developed generally accepted accounting principles (GAAP)
to respond to the need for standardization. These principles define accounting procedures, and
understanding them is essential to producing accurate and meaningful records. Before we can understand
the concepts of general ledger, understanding these principles is a perquisite.

The success of any business, big or small, begins with an understanding of accounting. These reports
based on the generally accepted accounting principles, allow investors and other stakeholders to compare
one company to another. Accounting principles and concepts are developed from research, accepted
accounting practices, and pronouncements of authoritative bodies.

Who Defines GAAP?

The Financial Accounting Standards Board (FASB) is the authoritative body having the primary
responsibility for developing accounting principles. The FASB publishes Statements of Financial
Accounting Standards as well as Interpretations of these Standards.

Apart from “Financial Accounting Standards Board” (FASB), the American Institute of Certified Public
Accountants (AICPA), and the Securities and Exchange Commission (SEC) along with the statutory
authoritative bodies of various countries (Example – Institute of Chartered Accountants of India, for
India), all have all played an influential role in developing generally accepted accounting principles which
span across boundaries of nation and have global acceptability.

Efforts are still going on to emerge globally accepted principles, as we still found variations in principles
from countries to countries as well as from businesses to businesses that warrants a need to have different
accounting methods.

The “Why” of Accounting:

In this article we emphasize on accounting principles and concepts so that the learner can understand the
“why” of accounting which will help you define the “how” while designing automated accounting systems
because this “why” will help you will gain an understanding of the full significance of accounting.  In the
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following paragraphs, we discuss the five principles that are generally followed by accountants worldwide
and they are business entity concept, cost concept, the objectivity concept, the going-concern concept and
the monetary value principle. By applying generally accepted accounting principles in accounting
practices, accountants make sure that their work is consistent and meaningful to others.

GAAP1: The Business Entity Principle:

Under the business entity concept, the activities of a business are recorded separately from the activities of
the stakeholders. The Business Entity Principle states that a business must be considered a separate entity,
and only the transactions carried out by the business may be recorded in the accounting books. This
ensures that the financial picture of the business represents the activities and events of the business; this
reflects the economic impact and value of the business not of its stakeholders. The individual business unit
is the business entity for which economic data are needed and must be identified, so that the accountant
can determine which economic data should be analyzed, recorded, and summarized in reports.

The business entity concept is important because it limits the economic data in the accounting system to
data related directly to the activities of the business. In other words, the business is viewed as an entity
separate from its owners, creditors, or other stakeholders.

GAAP2: The Cost Principle:

The Cost Principle states that anything a business purchases is recorded as the amount paid, regardless of
its real or perceived value. This accounting principle requires the amounts in the accounts to be the actual
cost rather than the current or future value. Accountants can show an amount less than cost due to
conservatism in certain circumstances, but accountants are generally prohibited from showing amounts
greater than cost. This eliminates guesswork or the possibility of recording inaccurate information.

To help you understand this concept let’s consider a real estate transaction. Business has acquired a
building for $100,000 by paying the seller in cash after taking a loan from the bank. The Ask Price by
seller was $150,000 and the business was only willing to pay $90,000. As far as the valuation of the
property by the corporation is concerned it was valued at $120,000 for property tax purposes. Business
applied for a loan from bank and the approved property assessor estimated the market value of the
property to be $125,000. Bank only financed $75,000 against that valuation. After the business bought the
property it received an offer of $135,000 next day by a neighboring store for the same building. What
should be the amount that should be entered into the business’s accounting records?

As per the cost principle, the cost of the building for the business here is $100,000 and the other amounts
have no effect on the accounting records because they did not result in an exchange of the building from
the seller to the buyer. The cost concept is the basis for entering the exchange price, or cost, into the
accounting records for the business.

GAAP3: The Objectivity Principle:

Using the cost concept involves two other important accounting concepts—objectivity and the unit of
measure. The Objectivity Principle states that accounting operates on objective evidence. All transactions

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must have proof that they were carried out. The objectivity concept requires that the accounting records
and reports be based upon objective evidence.

In in earlier real estate example, while negotiating the deal, both buyer and seller, try to get the best price.
Only the final agreed-upon amount, on the basis of which the transfer of title was initiated, is objective
enough for accounting purposes. If the amounts at which property was recorded were constantly being
revised based on offers, appraisals and opinions, accounting reports could soon become unstable and
unreliable. The only reliable proof that a transaction occurred is found in source documents such as a sales
slip or an invoice and in this case the agreement to sell or sales deed.

GAAP4: The Unit of Measure Principle:

The unit of measure concept requires that economic data be recorded in monetary terms that are dollars or
any other currency as applicable. Money is a common unit of measurement for reporting uniform financial
data and reports. This principle also involves another linked principle of “Stable Monetary Unit of
Measure “that states that the value of the monetary measure (dollar) does not change. This ensures that the
unit of measure (dollar) is kept as a stable unit of measure for accounting purposes. It also makes it easier
to compare financial statements over time.

GAAP5: The Going-Concern Principle:

The 'going concern' concept directs accountants to prepare financial statements on the assumption that the
business is not about to go broke or be liquidated. So, unless there is significant evidence to the contrary,
accountants will base their valuations and their reporting of financial data on the assumption that the
business will remain in existence for an indefinite period. An indefinite period means the foreseeable
future or long enough for the business to meet its objectives and to fulfill its commitments.

The implication of this principle is that it establishes that a business is a continuing enterprise and that its
buildings, land, or equipment cannot be sold without disrupting the business. So unless the buildings, land,
or equipment are for sale, as in the case of liquidation, their market value is not recorded. This prevents
distortion in the objective value of the business.

Different bases of measurement may be appropriate when the entity is NOT expected to continue in
operation for the foreseeable future. Where a company is NOT a going concern, the break-up basis is used
where all assets and liabilities are stated at Net Realizable Value.

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GL in Accounting Software
Automated General Ledgers

In order for people inside and outside an organization to use financial data, transaction information is
organized by account in ledgers. A general ledger is the main accounting record of a business. Originally a
paper document, a ledger is now more likely to be an electronic document containing summarized
financial data and balances for all the accounts of an organization.

In automated systems like ERPs the General Ledger is the central repository for all transactions that get
recorded in various supplemental books, which are known as modules or sub ledgers. 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.

The respective journals may contain additional information other than the accounting information and all
activities or transactions get recorded in various Sub‐Ledgers(Specially in ERPs) irrespective of whether
they have a financial impact or not.  The example is the creation of PO’s in the purchasing modules
irrespective of them having no financial impact. However the same PO can later be converted into a
Payables Invoice automatically, that has accounting impact.

These 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.

Benefits of Automated General Ledger:

In Accounting Packages or in ERP’s like Oracle and SAP, “General Ledger” is the central repository of all
accounting information. Automated General Ledgers can be comprehensive financial management
solution that can provide highly automated financial processing, effective management control, and real-
time visibility to financial results.  It can provide internal controls that an organization need to meet
financial compliance. Some major benefits of automated general ledger system are explained below:

Flexible Accounting Model: In today’s complex, global, and regulated environment, finance
organizations face challenges in trying to comply with local regulations and multiple reporting
requirements.  Automated General Ledger system allows companies to meet these challenges in a
streamlined and automated way. You can define multiple ledgers based on your needs and they can be
used to cater to statutory, corporate, regulatory, and management reporting needs with the same
underlying financial data. With a single entry source multiple accounting representations can be
simultaneously maintained for a single transaction.  For example, a single journal entered in the main,
record-keeping ledger can be automatically represented in multiple ledgers (local and global consolidated)
even if each ledger uses a different chart of accounts, calendar, currency, and accounting principles.
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Multi-Currency: Automated General Ledgers provides multi-currency functionalities that can help
satisfy complicated global financial requirements. These features can perform currency conversion,
revaluation, re-measurement, and translation in accordance with local and international accounting
standards for a large number of currencies.

Transaction Processing & Control: 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. Automated General Ledger can provide variety of journal processing
options to help organization to capture transactions with efficiency and control.  Entry of journals can be
automated using journal templates or can be uploaded using a spreadsheet.

Accuracy and Real Time: 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.

Common COA: 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. Accounts in the chart of
accounts can be secured to prevent unauthorized access and viewing of sensitive financial data. They also
support accounts hierarchies to group accounting data.

Financial Statements: 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. 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. Stakeholder
can make effective decisions only when the underlying financial data is available timely on demand and
correct.

Reporting Flexibility: 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.

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 GL Overview
 What is accounting?

Accounting is a process designed to capture the economic impact of everyday transactions. Each day,
many events and activities occur in an entity, these events and activities are in the normal course of
business; however each of these events may or may not have an economic impact. Events or activities that
have an effect on the accounting equation are accounting events. The accounting equation is the basis for
all accounting systems. Now a days most of the accounting is automated using sub-ledger and general
ledger systems. 

The Accounting Process:

Accounting process enables accounting system to capture accounting data and provide the necessary
information to business stakeholders. Given below are the five steps in the accounting process:

 Step1: Identifying Business Stakeholders

 Step2: Understanding Accounting Needs
 Step3: Identifying Accounting Transactions
 Step4: Recording Transactions
 Step5: Preparing Accounting Reports 

Generally Accepted Accounting Principles (GAAP):

Generally Accepted Accounting Principles define the accounting procedures, and understanding them is
essential to producing accurate and meaningful records. Given below are the fundamental accounting
principles:

 GAAP1: The Business Entity Principle

 GAAP2: The Cost Principle
 GAAP3: The Objectivity Principle
 GAAP4: The Unit of Measure Principle
 GAAP5: The Going-Concern Principle 

Accounting Systems: Single Entry and Double Entry:

There are two common systems of bookkeeping single entry and double entry accounting system. The first
– single entry – is simplistic, recording each transaction only once, either as revenue or as an expense.

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 Double entry bookkeeping has become the standard, and is the preferred way of accounting, as it allows
businesses to track both the sources and application of money.

Accounting Methods: Cash V/s Accrual:

Two types of accounting methods are commonly used to record business transactions know as cash
accounting and accrual accounting. Under the cash accounting method, revenue is recognized and
recorded when the cash is received and expenses are recognized and recorded when the cash payments are
made. Under the accrual method of accounting, revenue and expenses are recognized and recorded, when
the product or service is actually sold to customers or received from suppliers, generally before they're
paid for. 

The Accounting Equation:

The following equation shows the relationship among assets, liabilities, and owner’s equity:

 Assets = Liabilities + Owner’s Equity

 Assets = Liabilities + Owner’s Equity + Revenues - Expenses

What do we mean by Journalizing?

Using the rules of debit and credit, transactions are initially entered in a record called a journal. In this
way, the journal serves as a record of when transactions occurred and were recorded.  The process of
recording a transaction in the journal is called journalizing. The entry in the journal is called a journal
entry.

What is General Ledger?

Transactions are first recorded in the general journal and then transferred, or posted, to the ledger, which
stores all the chart of accounts of a business. An account is defined as an accounting record that reflects
the increases and decreases in a single asset, liability, or owner's equity item (The Accounting Equation!!).
In addition, the ledger shows the balance of each account that helps the user understand the final effects of
the transactions.

While journals present a chronological listing of a company's daily transactions, ledgers are organized by
account. As a result, financial statements such as Balance Sheets and Income Statements can only be
generated from the general ledger not directly from the journals.

Automated General Ledgers

In order for people inside and outside an organization to use financial data, transaction information is
organized by account in ledgers. A general ledger is the main accounting record of a business. Originally a
paper document, a ledger is now more likely to be an electronic document containing summarized
financial data and balances for all the accounts of an organization.

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 In automated systems like ERPs the General Ledger is the central repository for all transactions that get
recorded in various supplemental books, which are known as modules or sub ledgers. 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.

Accounting Cycle:

Accounting Cycle is the collective and repetitive process of recording and processing the accounting
events of a company in different accounting periods. The series of steps begin when a business transaction
occurs and end with the period closure where the cycle is again repeated. The steps in accounting cycle
are:

 Step1: Identifying Business Stakeholders

 Step2: Understanding Accounting Needs
 Step3: Identifying Accounting Transactions
 Step4: Recording Transactions
 Step5: Preparing Accounting Reports

General Ledger Process Flow:

GL process flow is a five step process from recording the transactions in the system to finally running the
reports containing financial data out of the system. The input for GL Process Flow is the raw accounting
data and the output is the accounting reports that can be used to provide various levels of financial
information. The steps in general ledger process flow are:

 Step1. Create Journal or Import Journal from Sub‐Ledger

 Step2: Review Journals
 Step3: Approve Journals
 Step4: Journals Posting
 Step5: Run Financial Reports

Drilldown from General Ledger to Upstream Systems:

In the advances general ledger systems, users can drill down to sub-ledgers details from General Ledger
and can get all of the transactions details that comprise an account balance, regardless of which sub-ledger
originated the transaction. This functionality help in analyzing any account balance by understanding the
source of the transaction and viewing additional information that has been captured in the source system
and not imported in the general ledger system.

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 GL Process Flow
GL process flow is a five step process from recording the transactions in the system to finally running the
reports containing financial data out of the system. The input for GL Process Flow is the raw accounting
data and the output is the accounting reports that can be used to provide various levels of financial
information. The steps in general ledger process flow are:

 Step1. Create Journal or Import Journal from Sub‐Ledger

 Step2: Review Journals
 Step3: Approve Journals
 Step4: Journals Posting
 Step5: Run Financial Reports

Step1. Create Journal or 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. In the previous lesson we saw some examples of
commonly used subsidiary ledgers. Companies extensively use modules like accounts receivable, accounts
payable, inventory, assets, projects and cash management subsidiary ledgers. Data created in these sub-
systems need to be imported to general ledger for further processing, The accounting lines from sub-
ledgers can be imported in summarized form or detailed form.

General Ledger also allows users to directly add transactions in the GL. In that case you need to follow the
accounting principles and the steps explained in accounting process. At this stage the journals are entered
in the system and available for further processing, but they have not impacted the general ledger account
balances yet.

Step2: Review Journals:

Once the Journal is available in the General Ledger System you can query the journals that have been
created. While reviewing the journal, you can make edits/corrections if required.

You might need to make some adjustments to the journals coming from other sources if you want to
change the accounts or amounts that are coming from the sub-systems. Review functionality gives the
capability to query the journals based on different parameters and also make edits if required.

Step3: Approve Journals:

Accounting prudence requires that all financial transactions should be reviewed by someone other than the
person creating the transaction. Approval ensures validity and correctness of the transaction.  Segregation
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of Duties concept requires that the responsibility for related operations should be divided among two or
more persons. This decreases the possibility of errors and fraud.

In this step the system will validate the journal batch, determine if approval is required, and submit the
batch to approvers (if required), then notifies appropriate individuals of the approval results. Email
notifications can be sent to the approvers using the system and they can review and approve the journals.
This step is generally optional and many organizations skip this step by putting additional controls in the
process. If this feature is enables then the journal cannot be posted unless it has been approved.

Step4: Journals Posting:

An important feature of the general ledger is the "Balance" column, which keeps a running balance for
each of the account pertaining to which transactions are happening. The transactional data captured
through journals in the previous steps is transferred periodically to the columns in the general ledger.
Journals posting is a process of updating the database with the amounts.

The volume of transactions carried out by a business will indicate how often to post. A busier company
may post daily, while other companies may post weekly or monthly. Periodic postings is required to
ensure balances for accounts are current, so the business has the up-to-date financial information it needs
to make quick decisions. All transactions must be posted to the ledger at the end of an accounting period.
Once the Journals are posted users can query for updated account balances using the account inquiry
functions.

Journals Balances Updated: Posting process updates the journal balances. You can inquiry the account
balances in General Ledger for all posted transactions.

Step5: Run Financial Reports:

One way to determine financial progress of any organization is to look at the profit gained by a business.
Once you have the account balances and transactional data available in the system they need to be
formatted to meaningful information that can help users understand the financial history as well as equip
them to take informed decisions. To enable this business users need many types of financial reports.

The next step in the general ledger process is to generate these useful reports and the most common
reports run from General Ledger are Transactions Register and Trial Balance Report. ERPs come with a
large number of seeded reports as well as with tools to define user specified reports.

Given above is the generic general ledger process. Some systems may have slight variations to the above
process, but the underlying concepts remain more or less same!

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Inquiry & Drilldown
What is Drilldown?

In information technology, to drill down means to move from summary information to detailed data by
zooming in on something. In an ERP environment, "drilling-down" may involve clicking on some account
balance or summary representation in order to reveal transactional data.

To drill down is to navigate through a series of steps, for example, the user starts with the summary
balances that are made up of a group of accounts with individual balances, and drilldown takes the user
through the hierarchy to the individual account balances. The individual account balances are made up of
transactions that have been posted in those accounts for a specified period and further drilldown at this
second level takes the user to the set of transactions. These steps of moving from summary balance to
account balance belongs to the general ledger system, however, the transactions might have originated
from a subsidiary ledger. Further drilldown at this level will take the user to a level of greater detail where
the user can see the original transaction in the sub-ledger itself. Here in the drilldown process the user is
navigating from higher level of consolidated information to a deeper level into data, without leaving the
source system or changing user access.

When one drills down, one performs de facto data analysis on a parent attribute and inquiry of the detailed
attributes that constitute the parent attribute. Drilling down provides a method of exploring
multidimensional data by moving from one level of detail to the next. Drill-down levels depend on the
data granularity and drilldown is sub function of inquiry and analysis. Drilldown functionality allows the
business users to gain better business insight to make the critical decisions in order to beat out their
competition.

Upstream & Downstream Systems:

Upstream Systems: In geography, upstream literally means towards the source of a stream or river, or
against the normal direction of water flow. In the context of general ledger, upstream systems refer to the
systems that send data to general ledger system. In other words, upstream systems are subsidiary ledgers
and other source systems that are capturing the transactional data and sending the accounting data to the
general ledger for further processing.

Downstream Systems: Similarly, in geography, downstream literally means away from the source of a
stream or river, or in the normal direction of water flow. In the context of general ledger system,
downstream systems refer to the systems that take data from general ledger as their input. Some examples
are consolidation systems, enterprise performance management systems (EPM), reconciliation systems or
business intelligence systems. The financial data from general ledger is carried over as input for these
downstream systems for further processing.

Drilldown from General Ledger to Upstream Systems:

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In the advances general ledger systems, users can drill down to sub-ledgers details from General Ledger
and can get all of the transactions details that comprise an account balance, regardless of which sub-ledger
originated the transaction. This functionality help in analyzing any account balance by understanding the
source of the transaction and viewing additional information that has been captured in the source system
and not imported in the general ledger system.

Drilldown from Downstream Systems to General Ledger:

Many advanced EPM or Consolidation downstream systems provides the users with the capability to
drilldown from their system to underlying Enterprise Resource Planning (ERP) transaction data. Some
examples with the ability to drill down from Enterprise Performance Management (EPM) applications are
Oracle Hyperion Financial Management System and Oracle Hyperion Planning. Example for
consolidation system is Oracle Financial Consolidation Hub. These systems allow the user to drill down
from consolidated information to the related general ledger system. This provides user with greater
visibility into business processes and greater understanding of the consolidated data.

For most organizations, the basis for global financial consolidation, reporting and analysis, planning,
budgeting, and forecasting are derived from a company's existing operational information which is
generally stored in many different general ledgers like Oracle, SAP, PeopleSoft or JD Edwards systems
and drilldown allows the user to see the actual data in the various general ledgers that constitutes the data
in these systems. 

Drilldown within General Ledger System:

There are various drilldowns that are available in the general ledger system. We will briefly explain each
one of them:

Interactive Report: A Drill-Down Report is also called an Interactive Report and has more detail and
capability to analyze and inquire data at a granular level. For example the user is looking at Balance Sheet
Report with drill-down functionalities. The top-level information contains consolidated balances for group
of accounts such as current assets, fixed assets, etc. The drill-down functionality helps the user to select a
line item (e.g., fixed assets) and drill-down further to a detailed list (secondary list) which displays various
components of the fixed assets such as land, buildings, machinery, etc.

Summary Balances: Some general ledgers provide functionality to maintain summary accounts which
contains consolidated balance for the group of accounts clubbed under that summary account. Users may
drill-down to individual group accounts by using the drill down functionality.

Balances: Drilling down on balances in general ledger may take the user to line level transactions
constituting those balances.

Transactions: Drilling down on balances will take the user to the journal where the transaction has been
captured in the source system.

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 Intercompany
What are intercompany transactions?

An intercompany transaction occurs when one unit of an entity is involved in a transaction with another
unit of the same entity.  Most economic transactions involve two unrelated entities, although transactions
may occur between units of one entity (intercompany transactions).  Intercompany transaction is a
transaction that occurs between two units of the same entity. An intercompany transaction occurs when
one unit of an entity transacts with another unit of the same entity. It is a transaction between two
associated companies who file a consolidated tax return or financial statement.

Why intercompany transactions occur?

While these transactions can occur for a variety of reasons, they often occur as a result of the normal
business relationships that exist between the units of the entity. These units may be the parent and a
subsidiary, two subsidiaries, two divisions, or two departments of one entity.

It is common for vertically integrated organizations to transfer inventory among the units of the
consolidated entity. On the other hand, a plant asset may be transferred between organizational units to
take advantage of changes in demand across product lines. Intercompany transactions may involve such
items as the declaration and payment of dividends, the purchase and sale of assets such as inventory or
plant assets, and borrowing and lending.

Accounting Treatment for Intercompany Transactions:

An intercompany transaction is recognized in the financial records of both units of the entity as if it were
an arm’s-length transaction with an unrelated party. From the consolidated entity’s perspective, the
transaction is initially unrealized because unrelated parties are not involved; therefore, the intercompany
transaction needs to be interpreted differently than it was by either of the participating units. The
difference in interpretation generally results in the elimination of certain account balances from the
consolidated financial statements.

The purpose of consolidated statements is to present, primarily for the benefit of the shareholders and
creditors of the parent company, the results of operations and the financial position of a parent company
and its subsidiaries essentially as if the group were a single company with one or more branches or
divisions. Regardless of the type of transaction, the occurrence of an intercompany transaction, if not
removed (eliminated) from the consolidated financial statements, will often result in a misrepresentation
of the consolidated entity’s financial position.

 These transactions can occur for a variety of reasons, and normally occur as a result of the
normal business relationships between the units of the entity.

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 An intercompany transaction is recognized in the financial records of both units of the entity as if
it were an arm’s-length transaction with an unrelated party.
 These transactions might or might not be cash settled.
 From the consolidated entity’s perspective, the transaction is initially unrealized because
unrelated parties are not involved; therefore, intercompany transaction needs to be eliminated from the
consolidated financial statements.

Types of Intercompany Transactions:

Transactions between units of an entity can take several forms and can occur between any units of the
entity. Transactions flowing from the parent to the subsidiary are commonly called downstream
transactions, transactions from the subsidiary to the parent are commonly called upstream transactions,
and transactions between subsidiaries are commonly called lateral transactions. Hence intercompany
transactions can be classified as:

 Downstream Intercompany Transactions

 Upstream Intercompany Transactions
 Lateral Intercompany Transactions

Impact of Intercompany Transactions:

Interpreting the impact of intercompany transactions on the financial records of the units involved begins
with understanding how the transactions are initially recognized on each unit’s financial records.
Intercompany transactions need an effective system to manage them appropriately as it could be a
complex affair for globalized companies. Some complexities are streamlining intercompany trading with
unlimited trading partners, local statutory compliance with intercompany invoices for each of the trading
partners, intercompany reconciliation and transaction-level balancing for sub-ledger applications and
intercompany eliminations at period close.

It is also important to understand how each intercompany transaction impacts the income statement and
balance sheet of the units involved in the period of the intercompany transaction as well as in subsequent
periods.

Intercompany V/s Intracompany Transactions:

Intercompany Transactions are between two or more related internal legal entities with common control,
i.e. in the same enterprise. Intracompany transactions are between two or more entities within the same
legal entity. Hence intercompany is cross legal entities and intracompany is across various units belonging
to the same legal entity. Rules for intracompany processing can be determined by the organization based
on internal procedures and guidelines, however for intercompany transactions, companies need to follow
the GAAP and the law.
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 Intercompany Reconciliations:

Intercompany reconciliations are required to ensure that balances owed to and from companies (legal
entities) in the same group are in agreement so that when group accounts are prepared the intercompany
balances all cancel out on consolidation. As organizations use multi-currency and different accounting
systems, balances at business units or subsidiary companies may not match with each other and the
yearend process can be delayed. Too many reconciling differences may require investigation or resolution
before the balances are acceptable to management and/or auditors.

Some of the factors that give rise to intercompany differences are:

1. Individual companies may book items to intercompany balances and not confirm with the other
group company if they have recorded the other leg of the transaction.
2. Wrong posting to/from intercompany accounts, may post balances due from other members of
the group to sundry debtors or creditors
3. Currency rate differences due to recording transactions on different dates may translate at
different values when accounts are consolidated
4. Summarization by aggregating amounts and posting them as a single journal when the
counterparty posts amounts individually
5. Counterparties may be incorrectly identified by each other so that although the net positions are
correctly stated overall the actual balance details do not eliminate

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Journalizing: General Journals & Special
Journals
What do we mean by Journalizing?

Using the rules of debit and credit, transactions are initially entered in a record called a journal. In this
way, the journal serves as a record of when transactions occurred and were recorded.  The process of
recording a transaction in the journal is called journalizing. The entry in the journal is called a journal
entry.

Recording Journal Transactions:

As business has events and activities have economic impact and they give rise to rights and obligations
with the outside third parties, most businesses keep some form of diary or log of their activities. In
Accounting terms, a general journal is a book that records all a business's transactions in chronological
order. The general journal is also called "a book of original entry" because all transactions are entered here
first. A journal can be thought of as a book of original entry. As soon as a transaction happens, it's
recorded chronologically in a “Journal Register” with a brief description and an indication of accounts to
be debited and credited. Journals store information but in this sequential form, this transactional data
doesn't provide useful accounting information. For example, from a journal, you can't determine the
amount of total sales made to a specific client over a period of one month.

In the manual system of accounting following steps are taken to record a journal:

Step1: The date of the transaction is entered in the Date column.

Step2: The title of the account to be debited is recorded at the left-hand margin under the Description
column, and the amount to be debited is entered in the Debit column.

Step3: The title of the account to be credited is listed below and to the right of the debited account title,
and the amount to be credited is entered in the Credit column.

Step4: A brief description may be entered below the credited account.

Step5: The Post. Ref. (Posting Reference) column is left blank when the journal entry is initially recorded.
This is completed once the journal is posted.

A journal can be thought of as being similar to an individual’s diary of significant day-to-day life events.
In an ERP or Automated Accounting System the basic concept of Journal remains the same and the same
steps are used to capture relevant information in the system. Apart from the above mentioned steps
additional information like Journal Source, Journal Category or Created By etc. might also get stored in
automated systems.
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General Journals:

A simple general journal entry contains a debit to one account and a credit to another account to balance it
out under double entry accounting system. Number of line items in a journal entry may vary depending on
how many accounts are affected by a given transaction.

A business may choose to use a single general journal for documenting all transactions, or it may use
several special journals in combination with a general journal. In case of large businesses we have to use
special journals in conjunction with general journals to simplify the journalizing process. In the latter case,
the general journal is used to post any transactions for which no special journal exists, may be limited to
non-routine, closing and adjusting entries.

 A general journal is an essential part of any accounting process, whether it's the sole repository for
transaction information or it's being used in conjunction with special journals. In either case, a general
journal typically has five columns: date, description, posting reference, debit, and credit.

Compound entries are necessary when a transaction involves more than two accounts. For example, if a
sale involves adjustment of the advance given earlier and a balance to be paid at a later date, it will affect
the advance received account, the sales or revenue account, and the accounts receivable account.

Correcting, adjusting, and closing entries are recorded in the general journal, along with any other
transactions for which there is no special journal. Adjusting entries include the depreciation of equipment
and facilities or the accruals at the end of the period. Closing entries are journal entries made at the end of
an accounting period to return the balances of Income Statement accounts to zero.

Special Journals:

Special Journals are designed to facilitate the process of journalizing and posting transactions. They are
used for the most frequent transactions in a business. For example, in retail businesses, companies acquire
merchandise from wholesale vendors, and then in turn sell the merchandise to individuals. Sales and
purchases are the most common transactions for the retail businesses. A business such as a retail store will
record the following transactions many times a day for sales on account and cash sales.

The overall point of using special journals is to minimize work effort by grouping transactions with
similar characteristics.

Types of Special Journals:

The types of Special Journals that a business uses are determined by the nature of the business. Special
journals are designed as a simple way to record the most frequently occurring transactions. There are four
types of Special Journals that are frequently used by most businesses: Sales journals (made on credit),
Cash receipts journals (from cash sales and accounts receivable), Purchases journals (made on credit), and
Cash payments journals (for purchases, accounts payable, or other cash payments).

1. Sales Journals:

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Sales journals generally have just one line per transaction. In addition to the usual columns for date,
description of the account that's affected, and posting reference, a Sales Journal is likely to contain an
invoice number column. As a numbered invoice is typically associated with each sale, this allows for easy
cross referencing. Entries to the Sales Journal credit the sales account and debit accounts receivable. Sales
journals also record the corresponding accounts receivable debit that will be entered in the Cash Receipts
Journal. Some sales journals may also include columns for tracking sales taxes or cost of goods.

2. Cash Receipts Journals:

The Cash Receipts Journal also has the standard columns that appear in most journals, date, description
and posting reference. Cash receipts are entered as debits in the Cash/Dr. column because they increase an
asset – cash.  

3. Cash Disbursements Journals:

The Cash Disbursements Journal has columns for the date of the payment, the account debited, and the
posting reference, as well as check number, as most purchases are paid by company check. Entries to the
Cash Disbursements Journal are credits to the cash account.

4. Purchases Journal:

The Purchases Journal is strictly for purchases made on delayed terms. Apart from the standard date and
reference number columns, it also has a column to track the accounts receivable credits that offset the
purchase accounts debits entered.

Recording Transactions: Tips for Journalizing Transactions:

The following is a useful method for analyzing and journalizing transactions:

Step1: Collect & Analyze Source Documents:

The first step towards making entries in the general journal is to understand the source of a transaction.
Transactions must be supported with proof, such as source documents. The use of source documents is
warranted by the two generally accepted accounting principles discussed earlier, the Objectivity Principle
and Cost Principle. Objectivity principal states that accounting information must be based on objective
data and the Cost Principle demands that all goods and services are recorded at cost rather than any other
perceived value.

Source documents are the business papers, and they represent the source of each transaction. Source
documents provide objective proof that the transaction was carried out, and they contain useful
information. Source documents include checks, invoices, sales slips, purchase orders, material receipt
notes, dispatch orders, tax challans, bank statements, and payroll statements.

Step2: Analyze the Accounting Impact of the Transaction:

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Carefully read the description of the transaction to determine whether an asset, a liability, an owner’s
equity, revenue, an expense, or a drawing account is affected. For each account affected by the
transaction, determine whether the account increases or decreases. Determine whether each increase or
decrease should be recorded as a debit or a credit, following the rules of debit and credit explained in the
previous lesson.

Step3: Record the Transaction:

Once source documents are collected, and the accounting impact analyzed, the transactions are recorded,
or journalized chronologically. The general journal is organized to record transaction information in a very
efficient way. Only the necessary information is entered, such as the date of the transaction, a description
of the transaction, the titles of the affected accounts, and the monetary amount of each debit and credit.

General journals and special journals store transaction information that is later on posted to the general
ledger of a business. This article clubbed with the pervious articles builds the foundation for us to move to
the concept of General Ledger. In an ERP or an Automated Accounting System the fundamental activities
as explained above remains the same, only difference being the computer that is used to capture and
record the information. Based on the nature of the transaction for most of the activities in an ERP, the
accounting information can be defaulted from the setups created earlier.

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Journals: Entry & Import
Recording Journals in General Ledger:

Journals can either be directly entered in General Ledger or can be imported from Sub Ledgers. Most of
the journals are created along-with business transactions like sales, purchases, receipts and payments and
get recorded in respective sub-ledgers. As sub-ledgers generally capture data at more granular level, the
relevant accounting information must flow to general ledger for posting and subsequent reporting. From
sub-ledgers they need to be imported to general ledger for financial recording and reporting.

Journal Entries can also be created manually in the General Ledger by entering all the relevant accounting
information. ERP’s can also automate certain type of Journal Entries like recurring, reversing or allocating
journals. In case of manual entry follow the steps and guidelines outlined in Recording Journals tutorial.

Importing – Detail V/s Summarized:

While importing journals from Sub Ledgers, journals can be clubbed together for same accounts and
posted in General Ledger as summarized.  

Various general ledger systems provide functionality to create Summary Journals which summarize all
transactions for the same account, period, and currency into one debit or credit journal line. This results in
fewer transactions in the general ledger systems and makes financial reports more manageable in size. In
case of summary journals users, lose the one-to-one mapping of detail transactions in the sub-ledger to the
summary journal lines created by import process. However most of the organizations use this feature as
this prevents too many transactions in GL Accounts and transactions get clubbed based on category, type
or transaction source.

Using the drilldown functionalities available in most of the modern general ledger systems, users can still
perform various review and analysis functions, as even if the system create summary journals, it can still
maintain a mapping of how Journal Import summarizes sub-ledger detail transactions from feeder systems
into general ledger journal lines.

Journal Import Validations:

ERP’s and automated accounting systems must have built in validations during the import process to
ensure that the data is correct and complete. An effective Journal Import program should validate key
accounting information before it creates journal entries in the General Ledger application to prevent errors
and reconciliation efforts.

Given below are some of the common data validations that can happen during the GL Import process:

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1. Suspense Posting: Suspense posting puts the remaining amount in the suspense account in case the
debits and credits of the journal are not matching. In case it is not required, Journal Import should reject
all invalid lines that do not balance.

2. Duplicate Batch Name: If batch name is a unique field then Journal Import should ensure that a batch
with the same name does not already exist for the same period in General Ledger application. Similarly it
must also check to ensure that more than one journal entry with the same name does not exist for a batch.

3. Attributes that can be validated to ensure that journals contain the appropriate accounting data could be
accounting books, period, source, currency, category, accounting date, reversal period, account validation,
account code combinations, effective date, roll date, and any other required validations.

Import Using Excel:

In today’s accounting world, financial and operational data typically is stored in a variety of programs and
formats. Excel is one of such tools, most widely used by the accountants! When accountants need to
prepare a report based on data from various systems, the first step is to export the data into Excel. Many
times accounting information is stored in a chorological order in excels by the accountants, and examples
include adjusting entries and recurring entries.

Benefits of using the excel upload feature is that it makes life much easier for data operator and accounts
executives. The great flexibility of excel based application increases productivity, and results in reduced
training costs as most users are already familiar with the excel functionalities and also improves user
acceptance for automated systems. The biggest benefit comes from the fact that excel upload can also
work in disconnected environments.

Typically, most of the automated systems provide functionality to import accounting data from Excel to
general ledger and create journals. Most ERP’s provide ability to upload journals using the MS Excel
worksheet. You can create journals in Excel Template and upload directly to General Ledger.

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Journals: Posting and Balances
What is Posting?

As we discussed in the preceding tutorials, a transaction is first recorded in a journal. The journal is a
chronological listing of the accounting events. Periodically, the journal entries are transferred to the
accounts in the ledger. An organization's ledgers contain each and every account the organization uses,
organized by account code. The final step of the bookkeeping phase is, posting to the general ledger. The
process of transferring the debits and credits from the journal entries to the accounts is called posting. The
ledger is a history of transactions by account. The purpose of posting is to maintain and be able to
determine the balance of each specific account.

In practice, businesses use a variety of formats for recording journal entries. The journals may be part of
either a manual accounting system or a computerized accounting system. The posting of a journal entry to
a ledger account is a straightforward process. Posting transfers information already in the journal,
requiring no further analysis. Remember, the key information in the ledger is the same as what's in the
journal. The date, description, account names, account codes, and debit and credit amounts are all there in
the ledger account, just in a different format.

Posting – Process Difference between Manual and Computerized Accounting Systems:

Manual Accounting Systems: As discussed earlier the preceding steps in the accounting cycle are to
identify and analyze the transaction and record by making journal entries. Each single-line journal entry
affects two ledger accounts. A typical bookkeeping process records transactions chronologically to a
journal, posts daily to subsidiary ledgers, and posts periodically to the general ledger. After posting the
transaction to the general ledger, you return to the journal entry and put in the reference number of each
ledger account affected by the debit and credit. This indicates to anyone looking at the journal that the
entry has been posted to the ledger.

Automated Accounting Systems: In the automated accounting systems posting can be understood as the
process to update (post) the details of transactions into the database, perform calculations and update
account balances impacted from the transaction(s). During the posting process most accounting systems
validates the Journal Entry for completeness and accuracy. Example of validations performed are –
Correct Accounting Period, Balanced JE (Debit=Credit) or Valid Accounts

Posting in Automated Systems:

During the posting process the system applies the values in the journal entry to the database resulting in
accounting data getting appended to the numbers in the database. Journals once posted cannot be edited or
modified. Ideal business process is to reverse these entries if any corrections need to be made. To verify
accounts, total balances from subsidiary ledgers are compared to the totals in each general ledger account.

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In the example shown in the figure, in the first step the journals are entered. Once the journals are entered,
they is available in the systems for Review, Approval and Posting. As this point current balances in the
accounts are not impacted. Next three boxes depict that as the journal gets posted, the current balances are
updated to show the impact of the entered transaction. Hence posting is the process to update account
balances with the transaction amount.

Posting from Subsidiary Ledgers:

As discussed in earlier tutorials, it is common for businesses to use subsidiary ledgers to track information
with similar characteristics. The number and types of subsidiary ledgers and the level of detail contained
in each varies substantially with the needs of the organization. There are many possible subsidiary ledgers
as explained in examples on subsidiary ledgers article. At the end of a given period – such as a week or a
month – the sub-ledger journal information can be posted to the ledgers in summary form, making the
process of posting more efficient. Posting to subsidiary ledgers in addition to the general ledger is a good
option for when more detail is required.

The relationship between journals, subsidiary ledgers, and the general ledger is slightly more complex
than that between general ledger journals and general ledger. Each subsidiary journal has entries that share
the same characteristics, but the listing still reflects changes to two or more accounts in the general ledger.
Subsidiary ledgers correspond to the control accounts in the ledger, the journal transaction is entered in
sub-ledgers first, usually on a daily basis. Subsequently these also get posted from the sub-ledgers to the
general ledger, usually weekly or monthly.

The general ledger control account balances are checked against the totals in the subsidiary ledgers to
ensure correctness at the end of the accounting period. To verify a subsidiary ledger such as the Accounts
Receivable ledger, you begin by calculating the sum of the accounts with balances in the subsidiary
ledger. You then compare that to the running balance in the accounts receivable control account of the
general ledger. If the totals match, you can assume that the ledgers are accurate. 

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Journals: Review & Approval
What is Internal Control?

Internal control plays an important role in the prevention and detection of fraud and errors to ensure
accuracy of financial results.  Internal control is the process designed to ensure reliable financial reporting,
effective and efficient operations, and compliance with applicable laws and regulations.  This needs to be
supplemented by effective control environment that ensures that established policies and procedures are
followed.

What are principles of Internal Control?

Management defines specific policies and procedures to achieve its objectives and run day to day
operations in the organization. The most important control activities involve segregation of duties, proper
authorization of transactions and activities, adequate documents and records, physical control over assets
and records, and independent checks on performance. These controls and checks ensure that financial
statements are complete and accurate.  

Principle1: Segregation of Duties:

The internal control principle of segregation of duties requires that different individuals be assigned
responsibility for different elements of related activities, particularly those involving authorization,
custody, or recordkeeping. Some examples in context of general ledger transactions are; the same person
who is responsible for recording a transaction should not be responsible for posting the same in the
general ledger. The recorded transaction should be checked and reviewed by someone else as having
different individuals perform these functions creates a system of checks and balances.

Principle2: Authorization of Transactions:

Proper authorization of transactions and activities helps ensure that all company activities adhere to
established guidelines unless responsible managers authorize exceptions granting another course of action.
In the context of general ledger for example, Journals with different levels of amounts should go to
various officers in the company for official authorization before they can be posted in General Ledger.
Another example could be that any journal necessitating a debit to Revenue Account must be approved by
accounts manager before it can be posted, to allow accounts manager to authorize and verify the reversal
of revenue.

Principle3: Adequate Documentation & Physical Control:

Adequate documents and records provide evidence that financial statements are accurate and based on
genuine business transactions pertaining to the entity. Controls designed to ensure adequate recordkeeping
include the creation of journals and other supporting documents that are easy to use and sufficiently
informative. Document sequencing is another functionality that is used to pre-number consecutive
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journals. It is also very important to document the review and approval process to make it available for
audit staff subsequently.  The simplest way to do this is to print out the journal entries and have the
reviewer initial them.  This should then be saved as support. In the automated general ledgers each user is
associated with a user id and transactions can flow to the reviewer and approver before posting and system
audit trail is sufficient audit evidence if such process has been established.

Physical control over assets and records helps protect the company's assets. These control activities may
include electronic or mechanical controls. Journals should be physically safeguarded in case they are on
paper and guarded with access privileges & established backup and recovery procedures in case of
automated systems.

What is the need for Journal Review and Approval?

Under the Sarbanes-Oxley Act, companies are required to perform a fraud risk assessment and assess
related controls. This typically involves identifying scenarios in which theft or loss could occur and
determining if existing control procedures effectively manage the risk to an acceptable level. The risk that
senior management might override important financial controls to manipulate financial reporting is also a
key area of focus in fraud risk assessment. Top managers of publicly held companies must sign a
statement of responsibility for internal controls and include this statement in their annual report to
stockholders. Review and approval in the accounting process are independent checks on performance,
which are carried out by employees who did not do the work being checked. These processes help ensure
the reliability of accounting information and the efficiency of operations.  Internal auditors and external
auditors rely on established processes to gaze the extent of their audit procedures.

Having the journal review and approval process in place ensures that all general journal entries get
reviewed.  This review is done to help prevent errors such as adjusting the wrong accounts and
transposing numbers.  It also helps protect against fraud by making sure there is a valid reason for the
journal entry and someone is not manipulating the accounts for vested interests.

Review Transactions/Edit Transactions:

The transactions can be reviewed for accuracy and completeness once they have been entered in the
automated accounting system. If review is done by another person who is not responsible or involved in
recording the transaction it can help to ensure that financial information in the journals accurately reflects
actual activity.

Review of transactions is done to ensure that the transaction is within the guidelines of the purpose of the
accounts used and is appropriately charged to the account following the concepts defined in accounting
equation. In case of manual journals one must ensure that the transaction is consistent with available
supporting documents. If any errors are found in the transaction, they can be edited and corrected at this
stage.

Journal Approval:

In case of journal recording the journal entered by one person needs to be approved by another person in
this step. This ensures having more than one person to complete the “Journal Creation Task”. In GL the
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 separation by getting the financial transaction approved by more than one individual prevents fraud and
error.

Journal Approval Workflow:

Automated accounting systems provide you with the functionality of sending the journals for approval to
the designated person. The system will validate the journal batch, determine if approval is required, and
submit the batch to approvers (if required), then notifies appropriate individuals of the approval results.
Review and Approval must happen before the journal is posted and balances are updated. 

ERP Systems provide review capabilities by providing a workflow framework to route these transactions
to appropriate used based on the rules defined in the system. Automatic notifications are sent to the person
who needs to take action.

Benefits of Journal Review and Approve:

Review and Approval mechanisms ensure:

 The transaction is reasonable, necessary and comply with applicable policies

 The amounts are correct, allowable for the account, allocable, and properly coded
 Charges are appropriately documented and are recorded in a consistent manner
 Funds are available in the account being charged
 Reduces the risk of error, waste, or wrongful acts or inappropriate, unauthorized or fraudulent
activities

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Prepayments and Prepaid Expenses
What are Prepaid Expenses?

Prepaid expenses, sometimes referred to as deferred expenses, are the amounts that have been paid in
advance to a vendor or creditor for goods and services. These payments initially get recorded as assets but
are expected to become expenses over time or through the normal operations of the business. Supplies,
prepaid insurance, prepaid advertising, advance rental, advance tuition fee and prepaid interest are some
examples of prepaid expenses that may require adjustment at the end of an accounting period.

What is the accounting treatment for prepaid expenses?

Prepaid Expenses are the expenses that are paid before the time period in which the benefit will be
consumed. The payment is a current asset on the balance sheet and this amount paid is then amortized, as
the consumption or utilization happens by charging proportionate amounts to expense accounts. Because
the advance payments are to obtain benefits for the organization over a period of time, the cost of these
assets is charged against profits throughout the period, usually on a monthly basis. Prepaid expenses are
treated as current asset, because the company has paid for something and someone owes services or the
goods in exchange in future.

Although the prepaid expenses are generally classified as Current Assets in the balance sheet, however it’s
an unusual classification as prepaid expenses will never, except in rare cases, be turned into cash in the
practical world. Prepaid expenses are expenses that have been paid in advance and therefore won't have to
be paid again, in a way they create cash by enabling the company to avoid paying out towards the expense
for the benefit period.

What are some examples of Prepaid Expenses?

Every business buys insurance of various kinds to manage and mitigate risk and to buy insurance the
organization needs to pay the premium to the insurance company, which is generally paid in advance,
typically for a year at a time, and covers the organization for specified risks for the policy period. For
some businesses insurance can be very costly item. The policy cover may extend many accounting periods
and hence companies allocate the cost of that protection over the period of time that is being protected,
based on the allocation per accounting period. Proper accounting treatment, matching and accrual
concepts, demand that the premium benefits all 12 months and should therefore be charged to profits over
the benefit period, not just the month in which you paid the premium.

So, if the company has defined its accounting period as a calendar month and the policy period is for 12
months, then the company will charge the insurance amount to expense over the 12 months that it protects,
usually by simply charging 1/12 of the total to expense each month. The balance of the advance premium
payment is considered prepaid and it rests in a prepaid expense account until it has been entirely written
off to expense. Other examples of prepaid expenses might be property taxes, advance rentals or advance
income tax installments.

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Adjusting Entry for Prepaid Expenses:

Prepaid expenses (or deferred expenses) are expenses paid in cash and recorded as assets prior to being
used. The most common form of an adjusting entry for prepaid expense would be to create an current asset
at the time of payment for the expense and charge it to expense account over the accounting periods for
which the benefit will be in place. These types of adjusting entries are usually permanent.

In case of prepaid expenses, there is a timing difference between the cash-flow and the actual charge to the
expense spread over the period of coverage of the advance. In case these cash-flows are not matched to the
accounting periods in which the expenses will actually happen, it will adversely affect the profits of the
period in which the cash flow has been recorded. Therefore prepaid expenses are treated as assets to
reflect the true state of affairs for the current accounting period.

Many business managers often overlook these timing differences because they think that the effects will
equal and compensate each other over time. But such differences can be very significant in the short term,
and can impact the critical cash flow planning.

Prepayment accounting entries in ERP:

Given below is a set of accounting entries that generally take place in automated systems and ERPs:

Step1: Raise a Prepayment Invoice

Debit: Prepaid Expense A/c

Credit: Liability A/c

(Example: Performa invoice of the total insurance period for the year has been received and company has
decided to purchase the policy)

Step2: Prepayment is release to the vendor:

Debit: Liability A/c

Credit: Bank/cash A/c

(Example: The payment has been released to the vendor)

Step3: When Invoice is raised for Expense:

Debit: Expense Charge A/c

Credit: Prepaid Expense A/c

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(Example: During the accounting period one, the charge for expense is made and prepaid expense is
reduced by the same amount)

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Recording & Analyzing Accounting
Transactions
The accounting equation serves as the basic foundation for the accounting systems of all companies. From
the smallest business, such as the local convenience store, to the largest business, such as large companies
accounting equation remains valid. In the previous article we gained an understanding of the concept of
accounting equation. In this article we will focus on how to analyze and recorded transactional accounting
information by applying the rule of credit and debit.

If you're not a bookkeeper or an accountant, and have not received the formal education in accounting or
finance, the whole system of debiting certain accounts and crediting others can seem overwhelming,
however don't be discouraged. If you can focus on understanding the fundamentals of double-entry
accounting; the logic for debiting and crediting to various accounts will be clear for you.  One of the
optimum uses of ERP and Automated Accounting packages is that the users only enter real business
transactions and ERPs will trace the accounts, calculate and enter the debits and credits.

Understanding “T” Account

Companies have to record and summarize thousands or millions of transactions daily that result as a result
of their business operations. To cater to this, accounting systems are designed to show the increases and
decreases in each financial statement item as a separate record. This record is called an account. An
account, in its simplest form, has three parts. First, each account has a title, which is the name of the item
recorded in the account. Second, each account has a space for recording increases in the amount of the
item. Third, each account has a space for recording decreases in the amount of the item. The account form
is called a T account because it resembles the letter T. The left side of the account is called the debit side,
and the right side is called the credit side. Amounts entered on the left side of an account are debits, and
amounts entered on the right side of an account are credits.

                              Asset Account

---------------------------------|-------------------------------------------

Debit                                 |                                   Credit

---------------------------------|---------------------------------------------

Accountants make use of “T” Accounts to analyze complex transactions, as it helps to simplify the
thought process. Many ERP’s also represent accounts in the “T” format for an easier understanding of the
accounting impacts.

Understand Your Transactions:

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The rule of debit and credit is a fundamental theory behind accounting procedures. This rule is derived
from the concept of double-entry accounting, which states that transactions are recorded in two or more
accounts, where an amount is entered on the debit side and an equal amount is entered on the credit side.
The practice of recording amounts on two sides is intended to minimize errors.

Recording transactions in accounts must follow certain rules. For example, increases in assets are recorded
on the debit (left side) of an account. Likewise, decreases in assets are recorded on the credit (right side)
of an account. The excess of the debits of an asset account over its credits is the balance of the account. To
apply the rule of debit and credit, and properly record amounts, every transaction is first analyzed to
determine the following:

What is being exchanged?

To begin analyzing the transaction, first determine what items are exchanged. Remember that a
transaction is defined as the sale or exchange of goods or services.

What accounts are affected?

The next step in analyzing the transaction is to identify the affected accounts. The three categories of
accounts in which a business records its transactions are assets, liabilities, and owner's equity.

Which of the accounts is increasing or decreasing?

Most transactions benefit—or increase—the business's resources in one area, and creates a corresponding
decrease in another. But a transaction does not always cause this effect. A transaction can result in just an
increase or just a decrease.

Are the amounts debits or credits?

The final step in the analysis is to determine whether to record the amounts on the debit side or the credit
side of the affected accounts.

Rule of Debit & Credit:

The rule of debit and credit states that for whatever amount is entered in the debit side, an equal amount
must be recorded on the credit side. To determine whether accounts are debited or credited, an analysis of
the effect of the transaction must occur first as detailed above. An understanding of the rule of debit and
credit is fundamental to performing accurate accounting procedures and the double-entry accounting
system has specific rules of debit and credit for recording transactions in the accounts. Given below is a
brief discussion on how to use various rules to determine the last two steps of analyzing transactions,
whether the accounts in increasing or decreasing and amounts should be debits or credits.

Balance Sheet Accounts:

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The double-entry accounting system is based on the accounting equation and specific rules for recording
debits and credits. The debit and credit rules for balance sheet accounts are as follows:

1.ASSETS:

Debit for increases and credit for decreases

2.LIABILITIES:

Debit for decreases and credit for increases

3.OWNER’S EQUITY:

Debit for decreases and credit for increases

Income Statement Accounts:

The debit and credit rules for income statement accounts are based on their relationship with owner’s
equity. As shown above, owner’s equity accounts are increased by credits. Since revenues increase
owner’s equity, revenue accounts are increased by credits and decreased by debits. Since owner’s equity
accounts are decreased by debits, expense accounts are increased by debits and decreased by credits. Thus,
the rules of debit and credit for revenue and expense accounts are as follows:

4.REVENUE ACCOUNTS:

Debit for decreases and Credit for increases

5.EXPENSE ACCOUNTS:

Debit for increases and Credit for decreases

Owner Withdrawals:

Common types of owner's equity accounts include Capital, Withdrawals, Revenue, and Expenses. The
debit and credit rules for recording owner withdrawals are based on the effect of owner withdrawals on
owner’s equity. Since owner’s withdrawals decrease owner’s equity, the owner’s drawing account is
increased by debits. Likewise, the owner’s drawing account is decreased by credits.

Normal Balances:

The sum of the increases in an account is usually equal to or greater than the sum of the decreases in the
account. Thus, the normal balance of an account is either a debit or credit depending on whether increases
in the account are recorded as debits or credits. For example, since asset accounts are increased with
debits, asset accounts normally have debit balances. Common types of asset accounts include Cash,
Accounts Receivable, Equipment, Office Supplies, and Prepaid Expenses.
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Likewise, liability accounts normally have credit balances. Common types of liability accounts include
Accounts Payable, Unearned Fees (money received in advance), and Notes Payable (money a business
promises to pay at a future date). 

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 Recurring Journals
What is a Recurring Journal?

A “Recurring Journal” is a journal that needs to be repeated and processed periodically.  Recurring Entries
are business transactions that are repeated regularly, such as fixed rent or insurance to be paid every
month. Each accounting period the journal should have the same accounts but the amounts could be
different. A recurring journal entry enables you to automate similar or repeating entries.  For users who
need to post certain transactions frequently with few or no changes, it is an advantage to use recurring
journals.

Recurring entries allow for common repeatable transactions to be saved in a template and created in
multiple accounting periods upon request, making it unnecessary to retype the entire transaction thereby
improving productivity. Auto generation of recurring accounting entries minimizes the occurrence of
errors and omissions. Systems allow generation of recurring entries at weekly, monthly or any other
frequency.

Characteristics of Recurring Journals:

 Needs to be entered periodically

 Same set of accounts are included every period
 Same number of Journal Lines
 Logic exists to define the line selection criteria
 Simplifies the process of recording repetitive journal entries
 Creates same journal entries with varying or same amounts in different accounting periods

Methods to Create Recurring Journals:

Same Account Combinations with no amounts:

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:

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.

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 Same Account Combinations with mathematical logic to calculate amounts:

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:

This method works best for repeatable transactions. For example annual expenses that can be charged
through twelve equal monthly entries such as, rent or insurance expense allocation or annual lease rentals.
Each month 1/12th of the total annual expense can be debited and credited to the appropriate accounts and
appear as the current month’s actual transaction. Users can benefit by creating a recurring entry for some
of the business scenarios listed below:

 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
 Depreciation
 Allocations

Generic Process to Create Recurring Journals:

Users need to define recurring journal formulas for transactions that they want to repeat every accounting
period, such as accruals, depreciation charges, and allocations. The formulas can be simple or complex but
need to have some logic of ascertaining the amounts for each of the accounts that need to be repeated.
Each formula can use fixed amounts and/or account balances and period-to-date or year-to-date balances
from the current period, prior period, or same period last year. Given below is a generic process flow to
define recurring journals:

1. Define Accounts, Amounts or Formula or Logic

2. Create Recurring Template

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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

Allocations V/s Recurring Journals:

Recurring Journals are for transactions that repeat every accounting period as explained above and
allocation Journals are for single journal entry using an accounting or mathematical formula to allocate
revenues and expenses across a group of accounting dimensions like cost centers, departments, divisions,
locations or product lines depending upon usage factors.

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 Reversals
 Discovery of Errors in Accounting Books:

It is obvious that care should be used in recording transactions in the journal and in posting to the
accounts. The need for accuracy in determining account balances and reporting them to the business
stakeholders is also evident.

In the practical world, errors will sometimes occur in journalizing and posting transactions. In some cases,
however, an error might not be significant enough to affect the decisions of management or others. In such
cases, the materiality concept implies that the error may be treated in the easiest possible way. For
example, an error of a few dollars in recording an asset as an expense for a business with millions of
dollars in assets would be considered immaterial, and a correction would not be necessary. However in
case the error is significant and material then it need to be corrected. In case of automated systems and
ERPs the general practice is to correct all identified errors.

Causes of Errors:

Some of the most common errors in the recording and posting steps are described below:

1. Failure to record a transaction or to post a transaction.

2. Recording the same erroneous amount for both the debit and the credit parts of a transaction.
3. Recording the same transaction more than once.
4. Posting a part of a transaction correctly as a debit or credit but to the wrong account.
5. Posting the transaction not in accordance with the accounting principles
6. Source system errors creating wrong transactions in General Ledger
7. Wrong period errors, prior period items getting posted in current period
8. Interface errors, sub-ledger feed is omitted or is posted twice
9. Coding errors – erroneous data is automatically created and posted.
10. Exchange Rate Errors- system has picked up a wrong exchange rate that needs to be corrected
11. Account balance errors
12. Wrong amount posted to an account.
13. Debit posted as credit, or vice versa.
14. Debit or credit posting omitted.
15. Posting errors

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 Correction of Errors by Reversals:

The procedures used to correct an error vary according to the nature of the error, when the error is
discovered, and whether a manual or computerized accounting system is used. Oftentimes, an error is
discovered as it is being journalized or posted. In such cases, the error is simply corrected. For example,
computerized accounting systems automatically verify for each journal entry whether the total debits equal
the total credits. If the totals are not equal, an error report is created and the computer program will not
proceed until the journal entry is corrected.

Occasionally, however, an error is not discovered until after a journal entry has been recorded and posted
to the accounts. Correcting this type of error is more complex. In the automated systems the journal cannot
be edited or deleted once it has been posted.  After the posting process has happened, the only way to
correct the errors is to reverse the original transaction that nullifies the accounting impact of the wrong
Journal and create a new journal with the correct accounting data.

In Automated Accounting Systems, it is not possible to delete transactions once the posting has been
made. In such systems reversals is the recommended way to correct the erroneous entries.  An example is
that one interface feed has been posted by mistake twice. This has inflated many income expense
accounts. A reversing entry with opposite debit and credit amounts to all the impacted accounts will
nullify the impact of the mistake.

Reversal of Adjustment Entries:

At the beginning of each accounting period, there is an accounting practice to use reversing entries to
cancel out the adjusting/accrual entries that were made to accrue revenues and expenses at the end of the
previous accounting period. Use of Reversing Entries makes it easier to record subsequent transactions by
eliminating the possibility of duplication.

 Reversing entries are made on the first day of an accounting period in order to offset adjusting
accrual/provision entries made in the previous accounting period.
 Reversing entries are used to avoid the double booking of revenues or expenses when the
accruals/provisions are settled in cash.
 A reversing entry is linked to the original adjusting entry and is written by reversing the position
of debits with credits and vice versa.
 Net impact of Original Entry and Reversing Entry on the accounting books is always zero.

Automatic Reversals:

Large organizations need to routinely generate and post large numbers of journal reversals as part of their
month end closing and opening procedures. Automated journal reversals save time and reduce entry errors
by automatically generating and posting journal reversals. Users generally need to define journal reversal
criteria which are the reversal business rules for journal categories or classes along with the reversal
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method, period and date. The journal will be reversed based on the method, period and date criteria
defined for that journal category/class when a new accounting period is opened.

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 Reversing Journal Entry
What is a Reversing Journal Entry?

A reversing entry is a journal entry to “undo” an adjusting entry. When you create a reversing journal
entry it nullifies the accounting impact of the original entry. Reversing entries make it easier to record
subsequent transactions by eliminating the need for certain compound entries.

Reversing entry can be created in two ways. First method is to use the same set of accounts with contra
debits and credits, meaning that the accounts and amounts that were debited in the original entry will be
credited with the same amount in the reversing journal “nullifying” the accounting impact. The second
method is to create a journal with same accounts but with negative amounts that will also nullify the
accounting impact of the original transaction.

Automated Process Requirements:

1. The accounts have been setup in the chart of accounts.

2. The reversal criteria have been specified in the original adjustment or accrual journal, otherwise
the user generally needs to submit the journal manually for reversal.
3. The date of the reversing journal has already been specified and accounting period for that date is
available for creating and posting transactions.

Process Flow Steps

1. Enter a journal that reverses in the next month.

2. Select the appropriate reversal option.
3. At the beginning of next period system creates a reversing entry dated the first day of the next
accounting period.

Example of a reversing entry:

The business has taken premises on rent. The rent payable for each month is $200 and invoice is raised by
the landlord on 15th of the subsequent month. Accounting department takes 5 days to process the payment
and deposit the amount in the Landlord’s account. December is the close of the accounting year and
invoice of rent for the month of December will be received by the company on 15 th of January and
payment will be made by 20th of January.

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Closing Books: On 31st of December, the accounting department passes the rent accrual accounting entry,
debiting the “Rent Expense” and crediting the “Rent Payable Account”. This entry records the rent for the
month of Dec and creates a liability for “Rent Payable” to landlord next month. At the beginning of next
accounting year, on the day one this entry is reversed by debiting the “Rent Payable” and crediting the
“Rent Account”.

Making Payment: Once the payment for Rent is made on 20 th January (Again by Debiting “Rent
Expense” and Crediting “Bank Account”) this reversal will ensure that the rent for last year is not
impacting the current year financials as the net impact on the “Rent Expense” account will be zero. 

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Subsidiary Ledgers
What are Subsidiary Ledgers?

In the previous articles we have learnt that journals present a chronological listing of a company's daily
transactions, which are then posted to General Ledger. The general ledger of a business is the place where
all account information is posted and a balance is maintained for each account. Based on the order of the
Chart of Accounts, the general ledger contains accounts organized by assets, liabilities, shareholders'
equity, revenue, and expenses. 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.

Subsidiary ledgers are often used in addition to a general ledger, to focus on particular areas of interest
and capture additional and granular details pertaining to that particular area and reduce the need for
excessive details in the general ledger. General ledger accounts with large volume of repetitive
transactions or multiple transaction sources often warrant subsidiary ledgers. All the day to day financial
information for such accounts is first posted in Subsidiary Leaders and at a periodic interval, subsidiary
ledger information is summarized in the corresponding control account of the general ledger. In each
subsidiary ledger, subaccount balances are maintained for the various sources contributing transactions to
the account, and each source has its own sub-account level balance.

Balances in General Ledger are 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.

What is the Need for Subsidiary Ledgers?

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 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.

Let’s also 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.
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Subsidiary Ledgers also capture details pertaining to financial transactions like “Tax Numbers”, “Contact
Person”, “Telephone Number” or “Copy of Invoice”. In IT; subsidiary ledgers are also called Modules in
the accounting system.

To give you another 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.

What is Control Account in General Ledger?

Each subsidiary ledger has a corresponding control account in the general ledger. 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.

For example, accounts receivable is the controlling account in the general ledger for the accounts
receivable subsidiary ledger. While the subsidiary ledger displays the detailed data by customer, the
control account summarizes that data by account that reflects summation of balances for all customers
captured in the respective subsidiary ledger. After entering the transactional information pertaining to
customers and credit sales in the AR Subsidiary Ledger, totals are subsequently entered into the control
account in the general ledger. The total balance information must be the same in both forms, so each
general ledger control account balance is checked against the combined balances of the individual
accounts in its subsidiary ledger at the end of the accounting period.

For any given business account, the level of detail needed varies. Therefore, some general ledger accounts
will not need subsidiary ledgers. Those with no corresponding subsidiary ledgers are not referred to as
control accounts.

What are the Advantages of Subsidiary Ledgers?

Subsidiary ledgers have a number of efficiency benefits. They show up-to-date information on individual
account balances, freeing the general ledger of the need for excessive detail. And just as with special
journals, subsidiary ledgers allow a simultaneous processing of general ledgers.

It enables you to keep track of your due to and due from with each of your external parties or transaction
sources, which helps you assess your financial situation with each of your customers and suppliers – for
example, how much money you owe to them.

Apart from just capturing the financial information that has an economic impact you can easily capture
additional information in your subsidiary leaders. For example you can capture the credit rating, payment
terms, contact information, birthday etc. against each of your customers.

Using an accounts payable subsidiary ledger, organized alphabetically by supplier, puts individual account
balance information at your fingertips. The same holds true for accounts receivable and customers.

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Some of the commonly used subsidiary ledgers are “Fixed Assets”, “Accounts Payable”, Accounts
Receivable”, “Projects” and “Inventory” and they all send the financial data to the General Ledger.

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The Accounting Equation
The Five Account Types:

Double-entry accounting uses five and only five account types to record all the transactions that can
possibly be recorded in any accounting system. These five accounts are the basis for any accounting
system, whether it is manual of automated accounting system. The five account types are the following:

Balance Sheet Accounts: In accounting, the economic resources of a business are categorized under the
terms assets, liabilities, and owner's equity. These terms also refer to the three types of accounts in which a
business records its transactions.

1. Assets: Things of value that is owned and used by the business. Examples of assets include cash, land,
buildings, and equipment.

2. Liabilities: Debts that are owed by the business. These are the rights of the creditors or third parties
over the assets of the business. Examples of liabilities include amounts due to suppliers, loans payable
back to banks.

3. Equity: The owner's claim to business assets. These are the rights of the owners over the assets of the
business. Examples include capital invested by the owners, the shares subscribed by the public or the
residual profit made by the business last year.

Profit and Loss Accounts: The operations of the business can either result in profit or loss. It may
increase the economic value over a period of time in case of profit or might decrease the economic worth
in case of loss. All such activities can be recorded using two types of profit and loss accounts:

4. Revenue: The amounts earned from the sale of goods and services. Examples include sales, interest
received on bank deposits, commission earned by the business.

5. Expenses: Costs incurred in the course of business. Examples include purchases made for material,
payment of rent, expenses for employee costs.

The balance sheet accounts are permanent accounts that carry a balance from year to year, like checking
accounts, accounts receivable, and inventory accounts. The profit and loss accounts are temporary
accounts which track revenues and expenses for a yearlong fiscal period and are then closed, with
balances transferred to an equity account.

There can be thousands of sub-types; known as natural accounts which help in further classifying the
nature of the transaction, but they all belong to one of the above list, as practically all financial
transactions can be recorded using these five types of accounts.

The Economic Impact of Transactions:

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 Businesses conduct transactions by exchanging goods or services for money. Transactions can take
various forms, depending on the company, but whatever kind of transaction has occurred; it impacts the
business's resources. The resources of a business refer to its supply of goods, services, information, or
expertise that allows the business to operate and grow.

Businesses exchange items of equal value, real or perceived. Imagine that an exchange is like balancing a
scale—the left side goes down (a service is given) and the right side reacts (cash is received) to maintain
the balance of the scale. The exchange of goods or services, information or expertise has an impact on the
one side of the scale which is compensated by the value that the business gets in exchange that has an
impact on the other side of the scale. The perceived value of both these impacts should be equal on the
scale.

Accounting uses a technique to show how a transaction changes the business's resources while
maintaining a balance, or showing the equal value of the exchange. The accounting equation is a tool that
is applied throughout accounting activities to show how transactions affect the asset, liability, and owner's
equity accounts.

The Accounting Equation:

The resources owned by a business are its assets. Examples of assets include cash, land, buildings, and
equipment. The rights or claims to the assets are divided into two types:

1. 1.The Rights of the Creditors

2. 2.The Rights of the Owners

The rights of creditors are the debts of the business and are called liabilities. The rights of the owners are
called owner’s equity. The following equation shows the relationship among assets, liabilities, and
owner’s equity:

Assets = Liabilities + Owner’s Equity

This equation is called the accounting equation. Liabilities usually are shown before owner’s equity in the
accounting equation because creditors have first rights to the assets. Given any two amounts, the
accounting equation may be solved for the third unknown amount. The equation shown above represents
the format seen on a balance sheet.

The profit and loss accounts (representing revenues and expenses account types) also affect equity.
Revenues from the sale of goods and services increase equity, while expenses incurred in the course of
business decrease equity. Therefore, the accounting equation can be expanded to assets equal liabilities
plus equity plus revenues minus expenses.

Assets = Liabilities + Owner’s Equity + Revenues - Expenses

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Every transaction that has an accounting impact, will affect at least two accounts out of the five accounts
explained above. If a transaction causes one side of the equation (assets) to increase, then the other side of
the equation (liabilities or owner's equity) must also increase to keep the equation in balance. You can
apply the accounting equation by determining that the total of the asset accounts equals the total of the
liability accounts plus the total of the owner's equity accounts. Double entry accounting system will record
the appropriate debits and credits, and track the changes to assets, liabilities, equity, revenue, and expense
accounts. Keep this fundamental rule of accounting in mind when you need to determine how a
transaction affects your business's resources

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The Accounting Process
In this article we will focus on and understand the accounting process which enables accounting system to
provide the necessary information to business stakeholders. We will deep dive into each of the steps of
accounting and will understand how to identify accounting transactions and the process for recording
accounting information and transactions.

Step1: Identifying Business Stakeholders:

A business stakeholder is a person or entity having an interest in the economic performance of the
business. These stakeholders normally include the owners, managers, employees, customers, creditors,
and the government.

Owners: The owners who have invested resources in the business clearly have an interest in how well the
business performs. Most owners want to get the most economic value for their investments and they want
to maximize the total economic worth of the business. This economic worth includes results of past profits
and also reflects prospects for future profits.

Managers: The managers are the individuals who have been authorized to operate the business on a day
to day basis. They are responsible for various functions of the business as per the agreed roles and
responsibilities between them and the owners. Managers are primarily evaluated on the economic
performance of the business and therefore they also have an interest in maximizing the economic
performance of the business.

Employees: The employees provide services to the business in exchange for a paycheck. The employees
have an interest in the economic performance of the business because their jobs depend upon it.  The
better is the economic performance of the business the more security and compensation it offers to the
employees.

Customers: The customers usually also have an interest in the continued success of a business. For
example, if the company fails on economic performance it may not be able to fulfill its promised
obligations making the customers suffer.

Creditors: Like the owners, the creditors invest resources in the business by extending credit, such as a
loan or supplying material on credit. They have an interest in how well the business performs because
there recovery of credit/investment depends on the capability of the business generating enough cash to
pay them back.

Governments: Various governments and statutory bodies have an interest in the economic performance
of businesses. Central and State governments collect taxes from businesses within their jurisdictions.
Statutory bodies levy various taxes that are based on the economic performance of the business. The better
a business does, the more taxes these bodies can collect.

Step2: Understanding Accounting Needs:

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The accounting process starts with the identification of its stakeholders. Discussion in the last paragraph
will help you understand who could be a stakeholder for your business and identify the correct
stakeholders. The next step in the accounting process is to assess the various informational needs of those
stakeholders and design the accounting system to meet those needs.

Step3: Identifying Accounting Transactions:

The next step is to identify the events and activities that have an economic or monetary impact that is to
identify accounting transactions.  Every economic activity conducted within a business has a direct or
indirect effect on the finances of the company. These economic transactions need to be recorded. The
accounting process begins with identifying which transactions to record. For an economic activity to be
considered a transaction, it must be able to be expressed in monetary terms. Also, transactions must be
related to the business – stakeholders' or owners' private expenses are never included with business
transactions.

Step4: Recording Transactions:

The next step in accounting process is to record business activity by entering what accounts a transaction
affects and how. Recording transactions includes documenting revenues (by invoices or sales receipts),
and entering purchases (in the account payable account) and expenditures (in the check register). This step
sometimes also involve high level accounting tasks, such as recording sales orders, tracking prospective
customers, and projecting sales opportunities and cash flow.

To record and classify a transaction to appropriate accounts, proper understanding of accounting equation
is and accounting standards and practices is a must. Calculating and summarizing transactions in a
traditional accounting system is a tedious process and automated accounting frees accountants from these
repetitive tasks by calculating and summarizing hundreds or thousands of individual transactions and
generating reports to satisfy variety of stakeholders.

Step5: Preparing Accounting Reports:

Finally, once the accounting system records the economic data about business activities and events, the
next logical step is to prepare the business reports and provide them to the stakeholders according to their
informational needs. Double entry system enables accountants to prepare some standard reports like trial
balance, profit and loss account and balance sheet. Accounting reports are based on generally accepted
accounting standards and these reports are powerful tools to help the business owner, accountant, banker,
or investor analyze the results of their operations.

Stakeholders use accounting reports as a primary source of information on which they base their
decisions. They use other information as well. For example, in deciding whether to extend credit to a
company, a banker might use economic forecasts to assess the future demand for the company’s products.
The banker might inquire about the ability and reputation of the managers of the business.

Trial Balance
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 Double Entry Accounting System:

In the preceding tutorials, we illustrated the rules of debit and credit for recording transactions in accounts
using journal entries. We also discussed the accounting equation and established that, in doing so, the sum
of the debits is always equal to the sum of the credits for each journal entry. This equality of debits and
credits for each transaction is built into the accounting equation and because of this double equality; this
system of recording transactions is called the double-entry accounting system. In the double-entry
accounting system, each accounting entry results in two nominal accounts being debited and credited with
equal amounts.

What is a Trial Balance?

Practice of recording of same debit amount to one account and an equal credit amount to another account,
results in total debits being equal to total credits for all accounts in the general ledger. If the accounting
entries are recorded without error, the aggregate balance of all accounts having positive balances (Debit
Balances) will be equal to the aggregate balance of all accounts having negative balances (Credit
Balances). Trial Balance is the compilation of balances of all accounts in the general ledgers into debit and
credit columns. In double entry accounting system the total debts equal the total credits hence a
compilation of all the accounts will be balanced, that is Sum of Debits will be equal to sum of credits and
hence the sum of the trial balance will always be zero if debit balances are represented by positive
amounts and credit balances are represented by negative amounts.

How trial balance is prepared?

The first step to prepare a trial balance is to extract the account balances from each account in the general
ledger in a columnar form. Thus, before the trial balance can be prepared, each account balance in the
ledger must be determined. When the standard account form is used, the balance of each account appears
in the balance column on the same line as the last posting to the account. The next step is to calculate the
debits and then the credits in the respective columns. In short, the trial balance procedure involves five
steps:

1. Identify the accounts and their balances.

2. List the accounts and enter their balances in columnar format.
3. Add the debit balances.
4. Add the credit balances.
5. Compare the sum of the debits and the credits; they should match in double entry accounting system.

All automated accounting systems and ERPs come with trial balance as a standard report and it can be
generated for each accounting period.

Format of Trial Balance:

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 The important concept to understand is that a trial balance is a statement not an account. It is extraction of
all balances from all accounts in a general ledger. It is valid for a particular date. It is always prepared
with reference to an accounting period with reference to a particular date. Trial Balance is true for the date
for which it has been drawn. The traditional format of trial balance includes following columns:

1. Serial Number
2. Name of the General Ledger Account
3. Ledger Folio or Account Number
4. Debit Balance
5. Credit Balance

Trial Balance and Error Prevention:

Because of the volume of data manipulated when bookkeeping, errors are easy to make, since numbers are
constantly being added or subtracted. How can users be sure that he they have not made an error in
posting the debits and credits to the ledger? One way is to determine the equality of the debits and credits
in the ledger. A trial balance checks the equality of the debits and credits. Taking a trial balance is done
after posting to the ledger, but can also be performed throughout accounting activities. This equality
should be proved at the end of each accounting period, if not more often.

Balances are Equal !

The trial balance does not provide complete proof of the accuracy of the ledger. It indicates only that the
debits and the credits are equal. This proof is of value, however, because errors often affect the equality of
debits and credits. If the balances equal in a trial balance, there still may be an error. Errors can easily be
made because numbers are transferred so many times. During accounting activities, wrong amounts can be
recorded, numbers transposed, and amounts debited instead of credited. Sometimes errors occur without
affecting the balance.

Balances are not Equal !!

If the two totals of a trial balance are not equal, an error has occurred. If the trial balance shows that the
debits do not equal the credits, then another trial balance should be taken. If the debits still do not equal
the credits, then an error exists and must be found.

How to locate Errors?

There exist some techniques that are used by the accountants to locate the errors if trail balance has
resulted in unequal amounts. Some tips are given below:

 Take the trial balance in reverse order. This is known as backtracking and helps in locating the errors.
 Take the difference between the sum of the debits and the sum of the credits and analyze the difference.
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 If the difference is equal to an account balance then an error in posting to the wrong side of the account
has occurred.
 If the difference is divisible by nine then numbers have been transposed. To locate the error, compare the
data in the trial balance against the data in the ledger to make sure numbers were copied correctly.
 If the difference is divisible by ten, then an error in addition or subtraction has occurred. In this case,
recalculate the sums in the debits and credits in the trial balance.

Why we need Trial Balance?

Bookkeeping is the act of recording transactions, while accounting includes bookkeeping activities plus
the preparation, analysis, and interpretation of financial information. Once we have recorded the
transactions, the next step is to convert this data into meaningful information that can provide insights to
the business stakeholders.

Trial Balance is usually drawn at the end of every reporting period. Trial Balance becomes the basis for
advanced reports like Balance Sheet and Profit and Loss Accounts. Concept of “Balancing” and
“Suspense Posting” ensures that Journals in an automated systems and ERPs are always balanced resulting
in a balanced trial balance. Trial Balance is used for financial reporting, management reporting,
consolidation process and reconciliation processes.

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Unearned Revenue or Deferred Revenue
What is unearned revenue?

Unearned revenues, sometimes referred to as deferred revenues, are items that have been initially recorded
as liabilities but are expected to become revenues over time or through the normal operations of the
business. Unearned revenues (or deferred revenues) are revenues received in cash and recorded as
liabilities prior to being earned. Unearned revenue is a liability to the entity until the revenue is earned.

Prepaid expenses and unearned revenues are created from transactions that involve the receipt or payment
of cash. In both cases, the recording of the related expense or revenue is delayed until the end of the
period or to a future accounting period as per accounting prudence and matching and accrual principles. It
results from the company's receiving payments in advance for services or products that have not yet been
provided. The company now ''owes'' that amount of services or products to its customer. This ''debt'' will
be satisfied when those services or products are provided.

Examples of Unearned Revenue:

Some examples of unearned revenue are unearned rent, tuition received in advance by a school, an annual
retainer fee received by an attorney, premiums received in advance by an insurance company, and
magazine subscriptions received in advance by a publisher. Another example of unearned revenue would
be if the customer paid a deposit for a custom ordered machine that has not been delivered, the deposit
would be recorded as unearned revenue.  A magazine subscription results in deferred revenue for the
publisher because the payment is received in advance; it will be converted into actual revenue as issues of
the magazine are delivered.

An airline that receives advance payment for tickets should also record the transactions as unearned
revenue. Similarly, professional service providers such as accounting, legal and contracting firms that
accept deposits should record them as unearned revenue. Companies that provide warranties to their
customers for extended time period and charge for these warranties also deal with unearned incomes.

Accounting Treatment of Deferred Revenue:

Companies using accrual accounting method should adhere to the revenue recognition principles and the
matching principles. Companies should recognize revenue only in the same accounting period in which it
is earned. Consequently, when companies accept deposits or advance payments, they should record them
as unearned revenues at the time of the receipt. Then, in the future when the goods or services are
provided to the customers, they should adjust the entries as earned income.

Unearned revenue is treated as a short- or long-term (or both) liability on a company's balance sheet,
based on the nature of the entry and underlying business contract. This type of adjusting entry will be
adjusted by another entry as and when the revenue will be earned to recognize revenue and offset the
deferred revenue.

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Examples of industries having unearned revenue:

Unearned revenue can be applied in almost all industries however it becomes very important in case of
some industries where advance payments is the norm like subscriptions for magazines. Companies
providing extended warranties need to treat there sales as unearned revenues at the time of sale.

Industries dealing in products that require installation services are accounted for as multiple-element
arrangements, where the fair value of the installation service is deferred when the product is delivered and
recognized when the installation is complete. For installations with customer acceptance provisions, all
revenue is generally deferred until customer acceptance. 

Warranty billings are generally invoiced to the customer at the beginning of the contract term.  Revenue
from extended warranties is deferred and recognized ratably over the duration of the contract. When a
dealer sells (sells being the key word) a service contract not all of the revenue is recognized at the time of
sale. Instead, it is recognized over the life of the contract and recorded as Deferred Service Contract
Revenue in the liability section of the balance sheet. Each month and or year a portion of the deferred
revenue is moved from liabilities to income. Unearned extended warranty revenue is reflected as unearned
revenues in accrued liabilities in the balance sheets.

Revenue from separately priced, self-insured service contracts is deferred at the point of sale and generally
recognized on a straight-line basis over the life of the contract for GAAP presentation.

Accounting Entries for Unearned Revenue:

In automated systems you can define rules that can determine the event which triggers the revenue
recognition. Till the time that recognition event is triggered, the amount remains parked in unearned
revenue account as a liability. If you enter an invoice with a Bill in Advance invoicing rule, Receivables
creates the following journal entries.

In the first period of the rule:

Debit: Receivables
Credit: Unearned Revenue
In all periods of the rule for the portion that is recognized.
Debit: Unearned Revenue

Credit: Revenue

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What is a General Ledger?
Transactions V/s Financial Transactions:

As discussed earlier, 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, but no financial transaction has happened unless the goods are delivered and
invoice is raised on the company issuing the purchase order by the supplier. All transactions that have
financial impact only need to be journalized. Transactions having financial impact are only posted to the
General Ledger.

What is General Ledger?

Once we have journalized transactions into general or special journal which are also referred to as "the
book of original entry, the transactions needs to be entered in the general ledger which is also called "the
book of final entry." The general journal and the general ledger both record transactions, but it is the
general ledger that groups similar transactions into accounts, and converts the accounting data into
meaningful information useful for the stakeholders.

Transactions are first recorded in the general journal and then transferred, or posted, to the ledger, which
stores all the chart of accounts of a business. An account is defined as an accounting record that reflects
the increases and decreases in a single asset, liability, or owner's equity item (The Accounting Equation!!).
In addition, the ledger shows the balance of each account that helps the user understand the final effects of
the transactions.

While journals present a chronological listing of a company's daily transactions, ledgers are organized by
account. As a result, financial statements such as Balance Sheets and Income Statements can only be
generated from the general ledger not directly from the journals.

Accounts in a ledger are simply groupings of interest. Sub Accounts are created for five types of accounts
Assets, Liabilities, Equities, Revenues, or Expenses. Separate records are created to classify these
accounts further to help understanding the accounting data at a granular level. Based on the individual
business needs the number and variety of sub-accounts (natural accounts) in a given business can vary
significantly. In order to group account information more usefully, a company may use subsidiary ledgers
as well as a general ledger.

Format of General Ledger:

The purpose of the general ledger is to categorize the information into accounts and provide the users with
the different account balances. This categorization ensures that the data is organized and easily accessible
to convert them into trial balance and finally convert it to financial statements. As the rules of debit and
credit and the accounting equation still apply, the summation of the balances of all the accounts in a

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 General Ledger is always equal to zero, because for every debit in Journal we have also created a
corresponding credit.

The standard format helps organize financial information in one place. Standard general ledger format
generally contains the following information:

1. The chart of accounts- classified into five account types - Assets, Liabilities, Equities, Revenues, or
Expenses.
2. The account's title that is the name of the account and must exactly match the account name as defined
in the master chart of accounts by the organization.
3. The Date columns – A general ledger may capture several dates, like the entered date, transaction date,
accounting date and the posting date. These dates may be same or may vary based on the business internal policies.
4. The Particulars column explaining the nature and purpose of the transactions that are being captured
against the respective accounts and amounts.
5. The Post Reference (P.R.) column specifying the reference information to the posting event, tying the
transaction back to the originating journal.
6. The Debit column representing the amount of debit posted to the account.
7. The Credit column representing the amount of credit posted to the account.
8. The Debit Credit Balance (DR./CR.) column to indicate the sign of the final balance. Sometimes a
negative (-) is used to represent credit balances.
9. The Balance column which keeps a running balance of each account. Due to this balance column, the
ledger is referred to as a "balanced column account."

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.

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What is Accounting
What is accounting?

Accounting is the process of transforming the financial information associated with economic activity into
usable financial information. Accounting is the art of recording, summarizing, reporting, and analyzing
financial transactions. An accounting system can be a simple, utilitarian check register, or, as with modern
automated enterprise resource planning systems, it can be a complete record of all the activities of a
business, providing details of every aspect of the business, allowing the analysis of business trends, and
providing insight into future prospects.

The American Institute of Certified Public Accountants (AICPA) defines accountancy as "the art of
recording, classifying, and summarizing in a significant manner and in terms of money, transactions and
events which are, in part at least, of financial character, and interpreting the results thereof."

The outcome of the accounting process is a group of financial statements that reflect an organization's
financial position, liquidity, and profitability. Periodically, financial statements are prepared to reveal the
financial position and the results of operations. These financial statements are the output of the accounting
process and become an input into the analysis and decision-making activities of business owners,
investors, managers, creditors, and government regulators.

These financial statements or reports are shared with the stakeholders (interested parties) who analyze,
interpret, and use this accounting information for their own purposes.  This information helps the users
with their analysis and decision making for various objectives like for investment or understanding and
improving the current business. Automated accounting is an information system that provides reports to
stakeholders about the economic activities and condition of a business.

Role of Accounting Department:

The accounting job is typically done by the Accounting Department, led by an accounting manager,
controller, comptroller, or similar title. These folks record all the transactions that occur as the company
does its business and then prepare reports that help the company management, and outside constituencies
understand the financial impact of those transactions.

The accountants maintain the accounting software, process all the documentation pertaining to
transactions that have occurred, and record them into the company's general ledger. From all these
transaction records the accountants are able to prepare a variety of reports. Some are for people outside the
company, like the government, bankers, investors, and stockholders and others are the reports that are
important for running the company efficiently. Accountants prepare financial reports that managers use to
understand their company’s financial past and make decisions about its financial future. Automated
accounting programs typically produce a variety of reports and we'll discuss these reports in depth in later
sub-sections that pertain to general ledger.

What is bookkeeping?
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Bookkeeping is the practice of recording transactions. Bookkeepers tend to focus on the details, recording
transactions in an efficient and organized manner, and they may or may not see the overall picture.
Accountants use the work done by bookkeepers to produce and analyze financial reports. Although
accounting follows the same principles and rules as bookkeeping, accounting converts them into
meaningful financial information that captures all of the details necessary to satisfy the needs of the
business — managerial, financial reporting, projection, analysis, and tax reporting. Effective accounting
practices across a company will create a system of financial reporting that gives a complete picture of the
business.

Etymology:

The word "Accountant" is derived from the French word Compter, which took its origin from the Latin
word Computare. The word was formerly written in English as "Accomptant", but in process of time the
word, which was always pronounced by dropping the "p", became gradually changed both in
pronunciation and in orthography to its present form as “Accountant”

What is the role of accounting in business?

As discussed earlier, accounting provides information for managers to use in operating the business
effectively and efficiently. In addition, accounting provides information to other stakeholders to use in
assessing the economic performance and condition of the business. Accounting is generally referred to as
the “language of business.” This is because accounting is the means by which business information is
communicated to the stakeholders.

For example, accounting reports summarizing the profitability of a new product help management decide
whether to continue selling the product. Likewise, financial analysts use accounting reports in deciding
whether to recommend the purchase of Company’s stock. Banks use accounting reports in determining the
amount of credit to extend to the company and suppliers on the other hand use accounting reports in
deciding whether to offer credit to the company for purchases of supplies and raw materials. Governments
and other statutory bodies use accounting reports to calculate and assess taxes appropriately.

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