General Ledger
The general ledger (GL), sometimes known as the nominal ledger, is an important accounting record of business based on Dual system (Debit and Credit) of bookkeeping. It will include all accounts such as current assets, fixed assets, liabilities, revenue and expense items, gains and losses etc., The postings are done to various accounts in general ledger. Posting is a process of recording credits on right side and debits on left side in the folios of the general ledger. Extra columns may be included to hold running total (similar to a checkbook). The general ledger is a compilation of the group of accounts from where items are extracted to financial statements. It is made up by posting transactions recorded from the various day books like sales, purchases, cash book and general journals. The general ledger can also be supported by one or more subsidiary ledgers that provide details of accounts in the general ledger. For eg., an accounts receivable subsidiary ledger for separate account for each credit customer which can be used for tracking that customer's balance separately. This subsidiary ledger would be totaled and compared with control account viz., Accounts Receivable to ensure correctness as part of the process of extracting a trial balance. The general ledger includes the date, description and balance and/ or total amount for every account. It is usually categorized into following main categories:
1. Assets: represent the different types of economic resources owned by a business, examples of Assets are cash, cash in bank, goodwill, building, inventory, prepaid insurance, prepaid rent, , accounts receivable etc.,
2. Liability: represent the different types of economic obligations of a business, like accounts payable, bonds redeemable, bank loan, including accrued interest.
3. Owner's equity: represent the residual equity of business including Retained Earnings and Appropriations (after deducting liabilities from Assets).
4. Revenue or income: represent the company's gross earnings like Sales, Service revenue and Interest Income.
5. Expense: represent the company's expenditures to enable it to operate. Some of the examples are salary, rent, electricity and water, depreciation, doubtful accounts, insurance, interest, and incase of manufacturing companies raw materials.
6. Gains: change in the value of an asset (increase) or liability (decrease) resulting from something other than the earnings process (e.g., profit on sale of an asset).
7. Losses: change in the value of an asset (decrease) or liability (increase) resulting from something other than the earnings process (e.g., loss on sale of an asset).
The main categories of the GL may be further subdivided into sub ledgers to include additional details of accounts as cash, accounts receivable, accounts payable, fixed assets, etc. Because each bookkeeping entry debits one account and credits another account in equal amounts, the
Double-entry bookkeeping system will ensure that the general ledger is always balanced, with the accounting equation:
Sub ledger
The sub ledger, or subsidiary ledger(SL), is a subset of the general ledger(GL) used in accounting. A subsidiary ledger is a set of similar accounts whose joint balances equal the total balance in a particular general ledger account. The GL account that sum ups a SL’s account balances is called a control account (master account). For e.g., an accounts receivable (AR) subsidiary ledger (customers' subsidiary ledger) will have a separate account for every customer who buys on credit basis. The combined balance of all account in this SL sum up to the balance of AR in the GL. Posting a debit / credit to a SL account and also to a GL control account does not violate the double entry system of accounting since SL accounts are part of GL as they are supplemental accounts that provide the detail to support the balance in the control account.
The AR subsidiary ledger is needed to most businesses as they may have hundreds / thousands of customers who purchase items on credit and make payments for those items and sometimes even return items. Recording all credit purchases, purchase returns and subsequent payments in one account when it is a part of GL, having numerous accounts will make the process cumbersome when these individual accounts are interspersed in GL. Hence classifying by type of account like AR separately would help in quick access to such similar type of accounts. Companies create SL whenever they need to control and monitor the individual account by keeping them separately. SLs are maintained for AR, AP, inventory, (separate accounts for each product) property, plant and equipment (separate accounts for each long-lived asset) etc.
Other examples of subsidiary ledger: While A R and A P are commonly operated through subsidiary ledgers, some of the other Ledgers maintained on same principle are: Notes Receivable (NR) Subsidiary Ledger -- A company (with investment activity) that holds a large number of NR, can maintain a separate SL having details like principal amount, due date, payer etc., Notes Payable Subsidiary Ledger –Similar to Notes Receivable, a company can use a Notes Payable (NP) Subsidiary Ledger for numerous notes outstanding. This will also have details of principal amount, due date, and payee etc.
Equipment Subsidiary Ledger -- Companies which carry a large numbers of equipment, to be depreciated over a number of years can maintain a SL indicating details of acquisition like date , value, useful life, rate and method of depreciation, accumulated depreciation etc., with controlling account in GL. The entries of sub-ledger and GL will be updated either through the stand alone system or the integrated system. While preparing the Trial Balance, the SL and GL balances are compared and correctness is ensured.
III. General Accounting – General Ledger Management
In addition to the control activities mentioned above, there are some general ledger management activities which general accounting function is responsible to perform. These activities carry significant importance for smooth operation of general accounting process. Some of the general ledger management activities are described below:
A. Journal Creation and Posting
This topic will describe the process to be adopted for creation and posting of journal entries. Input: 1. List of expenses for which journal entries need to be created 2. List of account heads/expenses for which accrual entries need to be passed 3. Accrual/Reversal Amount (in case of Variable Recurring entries) 4. Open GRN (Goods Receipt Note) Report 5. Payroll calculation Process:
1. Journal entries will be created by the associate by entering the details like date, period, account number, amount, currency, cost center or profit center, description etc., There are three modes of journal creation:
Cost centers contribute to the profit of the company indirectly as they can only book costs. It has no control over sales or over the generating of revenue. Typical examples include production department of a manufacturing company, Marketing and Customer service, Research and Development etc. The cost center performance is measured by comparing budgeted costs and actual costs for a specified period.
Profit centers add profits directly to the company. e.g. sales department. A profit center manager is accountable for both revenues, and costs (expenses), and therefore, profits. A business may be broken down into various profit centers to give managers accountability of managing the profits of their centers.
a. Manual: When the accountant needs to propose the entry and after approval, he can type it in the system and post it. Manual entries are generally required at the time of re-classification, rectification etc.,
b. Semi-automatic: When the accountant enters the required details in the pre-defined template and once approved will be uploaded and posted in the system.
c. Automatic: This is the case when as soon as the accountant triggers the posting key, the entry will be automatically posted by the system, e.g., recurring entry or in case of GR-IR account, (because in this case as soon we prepare the GRN in material module, system interfaces the entry in the financial module) in case of restatement entry for foreign exchange revaluation for assets and liabilities, etc.
2. All journal entries created are approved before getting posted in system.
3. Once the entry is processed, system generates the document number for the transaction. The document number will be unique in nature.
4. Proper supporting documentation for entry should be archived for audit reason, with indication of the posting number.
Output: Journal entries Situations when manual entries are required: Manual entries are generally required at the time of re-classification, rectification, accrual entries, bank receipts, tax provision with the estimated amount of tax for the year, etc.
Acquisition or disposal of a business: Generally, systems do not support an automatic integration and accounting for a new business acquisition. Therefore, whenever there is a new business acquisition, accounting of a newly acquired business is a manual activity. Similarly, whenever a business is sold, the accounting entries for disposal of the same do not come through the system. In such situations, general accounting team takes care of ensuring appropriate accounting into the system.
Upload of data from Legacy Systems: Sometimes accounting is done on a different
system in one or some of the business units of any organization. However, for the
purpose of consolidation of accounts, the data from the legacy system is fed into the base
accounting application manually. General accounting function is responsible to ensure
data feeding into system through manual data entry.
Managing Failed Batches: Due to multiple dependencies on the various software
application and hardware devices, some support applications which feed data into general
ledger fail automatic interface, resulting incorrect presentation of accounting transaction.
In such situations also, appropriate manual journal entries are created and posted into the
base application to ensure true and fair picture of financial transactions.
Adjustment Entries for un-reconciled items: If there are some un-reconciled items
coming out of account reconciliations for which adjustment or reversal entry need to
passed, the same is also done manually.
Revaluation: inventory value adjustments and fixed assets value adjustments to reflect
their true market value which might be different than book value.
Key Risk Indicator
Journals posted to incorrect account codes
Double posting of any journal entry
Journals posted without authorization for the details and amount
Key Performance Indicators
Number of monthly correction entries as a percentage of total entries
Critical Success Factors:
Number of monthly correction entries as a percentage of total entries
Ensuring that all journal entries are supported by adequate documentation prior to posting
the same
Ensuring all journal entries are routed for approval
Ensuring adequate segregation of duties between recording, reviewing and approval of
Journal Entries
Ensuring all Journal Entries are created accurately for the correct amount and in the correct
accounting period
Ensuring that entries are created within the timelines
B. Treatment for Debit Note and Credit note
Debit & credit notes are the documents that communicate formally to the vendor that the
company has done adjustments during the pay transactions.
Debit Note: It is a document raised on the vendor indicating that the vendor owes the specified amount to the company. In other words, a debit note is a document that reduces Amounts Payable to a vendor. Reasons can be wrong/duplicate payments made to vendors, purchase return, wrong quantity or quality of product purchased, rate difference, discount, commission etc.
Example: Debit note in case of purchase returns Vendor Account Dr. To Purchase return (Goods has been returned in reference to debit note no…….)
Credit Note: It is a document indicating the amount owed by the business to the customer. It is a document used to adjust/ rectify errors made in sales invoice which has been processed and sent to customer. In other words, a document that reduces Amounts Receivable from a customer is a credit note. Some examples of when Credit Notes are issued
o Unit price overcharged or over-billed: For example you issued an invoice for an item for $2100 and the actual price of the item is $2010. Therefore Credit Note is issued to give a credit of $90 to the customer for the excess amount billed.
o Goods short shipped: You invoiced a customer for 100 units of your product but shipped 90 units only to them by mistake. The customer informs that he does not want the shortfall item now. Therefore you have to issue a Credit Note to the customer for the less quantity supplied of 10 units.
o Faulty goods returned or goods rejected by customer. A credit note is also issued for the goods returned by the customer to correct Accounts Receivable and Inventory.
o Product Wrongly Shipped: When the customer ordered Product X, product Y has been wrongly invoiced and shipped which may/ may not be at a different price. Hence to rectify this, Product X along with a Credit Note for Product Y as well as another invoice for
product X is sent. This will restore the inventory and Accounts Receivable in your books while billing the customer for the correct item and amount and the customer returns the incorrect Product Y.
o Discounts given after the invoice is issued: You sent an invoice for $1000. The customer then informs that a discount may be given by waiving $100 so that he will make payment
of $900. Once this is agreed, you would issue a credit note for $100 towards the adjustment of discount given.
o To Write-off Customer Short Payments: You send an invoice for $2000. The customer sends you a payment of $1995 only. You do not intend to recover the shortfall and hence your books indicate that $10 is yet to be recovered. To writeoff this amount a credit note is issued.
Amount can be refunded to the buyer on the basis of credit note or the buyer can apply that credit note to another invoice.
Example: Credit note in case of Discount Discount Account Dr. To Debtors (Goods returned by the customer with reference to credit note no. ---------)
Note: FTE should differentiate between debit note, credit note or invoice. Generally the mistake happens due to of lack of awareness or if the document is in vernacular language (in this case FTE should translate it in English or check with the knowledgeable person). When we receive a debit note from the other party, we account it like a credit note. This is because when he debited our account in his books we need to credit his account in our books.
C. Managing Chart of Accounts
The chart of accounts (COA) is a listing of all accounts in the general ledger, each account accompanied by a unique reference number. The list is naturally arranged in the order of the customary appearance of accounts in the financial statements. To set up a chart of accounts, one needs to define all the accounts to be used which should have an exclusive number to identify it. Every account in the chart is classified into various categories like asset, liability, equity, revenue, expense. Separation of individual accounts by several numerical places allows multiple new accounts to be placed between existing ones. For example, in small companies, the accounts are grouped according to type and then numbered usually using the following convention:
Asset 101-199
o 100-109 Cash
• 101 Cash - Regular Checking
• 102 Cash - Payroll Checking
• 103 Cash, Change, or Petty Cash Fund
o 110-119 Receivables
• 111 Accounts Receivable
• 112 Due from Employees
• 113 Notes Receivable
o 120-129 Property, Plant, and Equipment
• 121 Land
• 122 Buildings
• 123 Equipment
• 124 Vehicles
Liability 200-299
o 200-209 Current Liabilities
• 201 Notes Payable - Credit Line
• 202 Accounts Payable
• 203 Wages and Salaries Payable
• 204 Taxes Payable
o 210-219 Long-term Liabilities
• 211 Mortgage Loan Payable
• 212 Bonds Payable, due 2015
• 213 Discounts on Bonds Payable
Equity 300-399
o 300-309 Stock
• 301 Preferred Stock
• 302 Common Stock
• 303 Retained Earnings
Revenue 400-499
o 400-409 Product Sales
• 401 Store #1 Sales
• 402 Store #2 Sales
• 403 Store #3 Sales
o 410-419 Other Income
• 411 Interest Revenue
Expense 500-599
o 500-509 Insurance
• 501 Disability Insurance
• 502 Property & Casualty
o 500-509 Interest Expense
• 501 Finance Charge
• 502 Loan Interest
• 503 Mortgage
In larger companies, account types and account numbering could be something such as: asset accounts (1000+), liability accounts (2000+), equity accounts (3000+), revenue accounts (4000+), cost of goods sold (5000+), expense accounts (6000+), miscellaneous revenue (7000+), and miscellaneous expenses (8000+). Complex businesses may have few thousands of accounts and may require longer account reference numbers so that new accounts can be added without duplication or recycling the reference numbers. It is necessary to plan while assigning the account numbers in a systematic and logical way keeping in mind any specific industry standards. Managing COA involves different activities like:
1) Addition/Modification of Department/Cost Center
As business grows, the departments or cost centers are split for enhanced operation efficiency. In order to track transactions with respect to different SBUs or cost centers, new codes would be created in COA by the general accounting team. The process of addition or modification of COA follows pre-defined set of steps and may require an approval by concerned manager.
2) Enabling/Disabling Account Codes
General accounting function is responsible to enable and disable account codes. To answer the question why enabling and disabling of account codes is required, it could be said that certain accounts are created for specific purpose, and they may become irrelevant once the purpose is fulfilled. In such a scenario, these accounts need to be disabled. Similarly, an account which has been disabled may be required to be enabled again. Therefore, the general accounting team is responsible to perform these tasks.
3) Mapping Local COA to Global COA
General accounting team is also responsible to map local COA to global COA whenever there is a change to global COA. In fact they are responsible to ensure to note upfront if any modification is required to global COA to meet the local statutory/reporting requirements, and incorporate the same onto the changed global COA.
Key Risk Indicator Modifications/Amendments to Chart of Accounts without approval
Key Performance Indicators
Time to process GL master date requests
Unused account codes in Chart of Accounts identified and deactivated yearly
The general ledger (GL), sometimes known as the nominal ledger, is an important accounting record of business based on Dual system (Debit and Credit) of bookkeeping. It will include all accounts such as current assets, fixed assets, liabilities, revenue and expense items, gains and losses etc., The postings are done to various accounts in general ledger. Posting is a process of recording credits on right side and debits on left side in the folios of the general ledger. Extra columns may be included to hold running total (similar to a checkbook). The general ledger is a compilation of the group of accounts from where items are extracted to financial statements. It is made up by posting transactions recorded from the various day books like sales, purchases, cash book and general journals. The general ledger can also be supported by one or more subsidiary ledgers that provide details of accounts in the general ledger. For eg., an accounts receivable subsidiary ledger for separate account for each credit customer which can be used for tracking that customer's balance separately. This subsidiary ledger would be totaled and compared with control account viz., Accounts Receivable to ensure correctness as part of the process of extracting a trial balance. The general ledger includes the date, description and balance and/ or total amount for every account. It is usually categorized into following main categories:
1. Assets: represent the different types of economic resources owned by a business, examples of Assets are cash, cash in bank, goodwill, building, inventory, prepaid insurance, prepaid rent, , accounts receivable etc.,
2. Liability: represent the different types of economic obligations of a business, like accounts payable, bonds redeemable, bank loan, including accrued interest.
3. Owner's equity: represent the residual equity of business including Retained Earnings and Appropriations (after deducting liabilities from Assets).
4. Revenue or income: represent the company's gross earnings like Sales, Service revenue and Interest Income.
5. Expense: represent the company's expenditures to enable it to operate. Some of the examples are salary, rent, electricity and water, depreciation, doubtful accounts, insurance, interest, and incase of manufacturing companies raw materials.
6. Gains: change in the value of an asset (increase) or liability (decrease) resulting from something other than the earnings process (e.g., profit on sale of an asset).
7. Losses: change in the value of an asset (decrease) or liability (increase) resulting from something other than the earnings process (e.g., loss on sale of an asset).
The main categories of the GL may be further subdivided into sub ledgers to include additional details of accounts as cash, accounts receivable, accounts payable, fixed assets, etc. Because each bookkeeping entry debits one account and credits another account in equal amounts, the
Double-entry bookkeeping system will ensure that the general ledger is always balanced, with the accounting equation:
Assets = Liabilities + Shareholders’ Equity
Sub ledger
The sub ledger, or subsidiary ledger(SL), is a subset of the general ledger(GL) used in accounting. A subsidiary ledger is a set of similar accounts whose joint balances equal the total balance in a particular general ledger account. The GL account that sum ups a SL’s account balances is called a control account (master account). For e.g., an accounts receivable (AR) subsidiary ledger (customers' subsidiary ledger) will have a separate account for every customer who buys on credit basis. The combined balance of all account in this SL sum up to the balance of AR in the GL. Posting a debit / credit to a SL account and also to a GL control account does not violate the double entry system of accounting since SL accounts are part of GL as they are supplemental accounts that provide the detail to support the balance in the control account.
The AR subsidiary ledger is needed to most businesses as they may have hundreds / thousands of customers who purchase items on credit and make payments for those items and sometimes even return items. Recording all credit purchases, purchase returns and subsequent payments in one account when it is a part of GL, having numerous accounts will make the process cumbersome when these individual accounts are interspersed in GL. Hence classifying by type of account like AR separately would help in quick access to such similar type of accounts. Companies create SL whenever they need to control and monitor the individual account by keeping them separately. SLs are maintained for AR, AP, inventory, (separate accounts for each product) property, plant and equipment (separate accounts for each long-lived asset) etc.
Other examples of subsidiary ledger: While A R and A P are commonly operated through subsidiary ledgers, some of the other Ledgers maintained on same principle are: Notes Receivable (NR) Subsidiary Ledger -- A company (with investment activity) that holds a large number of NR, can maintain a separate SL having details like principal amount, due date, payer etc., Notes Payable Subsidiary Ledger –Similar to Notes Receivable, a company can use a Notes Payable (NP) Subsidiary Ledger for numerous notes outstanding. This will also have details of principal amount, due date, and payee etc.
Equipment Subsidiary Ledger -- Companies which carry a large numbers of equipment, to be depreciated over a number of years can maintain a SL indicating details of acquisition like date , value, useful life, rate and method of depreciation, accumulated depreciation etc., with controlling account in GL. The entries of sub-ledger and GL will be updated either through the stand alone system or the integrated system. While preparing the Trial Balance, the SL and GL balances are compared and correctness is ensured.
III. General Accounting – General Ledger Management
In addition to the control activities mentioned above, there are some general ledger management activities which general accounting function is responsible to perform. These activities carry significant importance for smooth operation of general accounting process. Some of the general ledger management activities are described below:
A. Journal Creation and Posting
This topic will describe the process to be adopted for creation and posting of journal entries. Input: 1. List of expenses for which journal entries need to be created 2. List of account heads/expenses for which accrual entries need to be passed 3. Accrual/Reversal Amount (in case of Variable Recurring entries) 4. Open GRN (Goods Receipt Note) Report 5. Payroll calculation Process:
1. Journal entries will be created by the associate by entering the details like date, period, account number, amount, currency, cost center or profit center, description etc., There are three modes of journal creation:
Cost centers contribute to the profit of the company indirectly as they can only book costs. It has no control over sales or over the generating of revenue. Typical examples include production department of a manufacturing company, Marketing and Customer service, Research and Development etc. The cost center performance is measured by comparing budgeted costs and actual costs for a specified period.
Profit centers add profits directly to the company. e.g. sales department. A profit center manager is accountable for both revenues, and costs (expenses), and therefore, profits. A business may be broken down into various profit centers to give managers accountability of managing the profits of their centers.
a. Manual: When the accountant needs to propose the entry and after approval, he can type it in the system and post it. Manual entries are generally required at the time of re-classification, rectification etc.,
b. Semi-automatic: When the accountant enters the required details in the pre-defined template and once approved will be uploaded and posted in the system.
c. Automatic: This is the case when as soon as the accountant triggers the posting key, the entry will be automatically posted by the system, e.g., recurring entry or in case of GR-IR account, (because in this case as soon we prepare the GRN in material module, system interfaces the entry in the financial module) in case of restatement entry for foreign exchange revaluation for assets and liabilities, etc.
2. All journal entries created are approved before getting posted in system.
3. Once the entry is processed, system generates the document number for the transaction. The document number will be unique in nature.
4. Proper supporting documentation for entry should be archived for audit reason, with indication of the posting number.
Output: Journal entries Situations when manual entries are required: Manual entries are generally required at the time of re-classification, rectification, accrual entries, bank receipts, tax provision with the estimated amount of tax for the year, etc.
Acquisition or disposal of a business: Generally, systems do not support an automatic integration and accounting for a new business acquisition. Therefore, whenever there is a new business acquisition, accounting of a newly acquired business is a manual activity. Similarly, whenever a business is sold, the accounting entries for disposal of the same do not come through the system. In such situations, general accounting team takes care of ensuring appropriate accounting into the system.
Upload of data from Legacy Systems: Sometimes accounting is done on a different
system in one or some of the business units of any organization. However, for the
purpose of consolidation of accounts, the data from the legacy system is fed into the base
accounting application manually. General accounting function is responsible to ensure
data feeding into system through manual data entry.
Managing Failed Batches: Due to multiple dependencies on the various software
application and hardware devices, some support applications which feed data into general
ledger fail automatic interface, resulting incorrect presentation of accounting transaction.
In such situations also, appropriate manual journal entries are created and posted into the
base application to ensure true and fair picture of financial transactions.
Adjustment Entries for un-reconciled items: If there are some un-reconciled items
coming out of account reconciliations for which adjustment or reversal entry need to
passed, the same is also done manually.
Revaluation: inventory value adjustments and fixed assets value adjustments to reflect
their true market value which might be different than book value.
Key Risk Indicator
Journals posted to incorrect account codes
Double posting of any journal entry
Journals posted without authorization for the details and amount
Key Performance Indicators
Number of monthly correction entries as a percentage of total entries
Critical Success Factors:
Number of monthly correction entries as a percentage of total entries
Ensuring that all journal entries are supported by adequate documentation prior to posting
the same
Ensuring all journal entries are routed for approval
Ensuring adequate segregation of duties between recording, reviewing and approval of
Journal Entries
Ensuring all Journal Entries are created accurately for the correct amount and in the correct
accounting period
Ensuring that entries are created within the timelines
B. Treatment for Debit Note and Credit note
Debit & credit notes are the documents that communicate formally to the vendor that the
company has done adjustments during the pay transactions.
Debit Note: It is a document raised on the vendor indicating that the vendor owes the specified amount to the company. In other words, a debit note is a document that reduces Amounts Payable to a vendor. Reasons can be wrong/duplicate payments made to vendors, purchase return, wrong quantity or quality of product purchased, rate difference, discount, commission etc.
Example: Debit note in case of purchase returns Vendor Account Dr. To Purchase return (Goods has been returned in reference to debit note no…….)
Credit Note: It is a document indicating the amount owed by the business to the customer. It is a document used to adjust/ rectify errors made in sales invoice which has been processed and sent to customer. In other words, a document that reduces Amounts Receivable from a customer is a credit note. Some examples of when Credit Notes are issued
o Unit price overcharged or over-billed: For example you issued an invoice for an item for $2100 and the actual price of the item is $2010. Therefore Credit Note is issued to give a credit of $90 to the customer for the excess amount billed.
o Goods short shipped: You invoiced a customer for 100 units of your product but shipped 90 units only to them by mistake. The customer informs that he does not want the shortfall item now. Therefore you have to issue a Credit Note to the customer for the less quantity supplied of 10 units.
o Faulty goods returned or goods rejected by customer. A credit note is also issued for the goods returned by the customer to correct Accounts Receivable and Inventory.
o Product Wrongly Shipped: When the customer ordered Product X, product Y has been wrongly invoiced and shipped which may/ may not be at a different price. Hence to rectify this, Product X along with a Credit Note for Product Y as well as another invoice for
product X is sent. This will restore the inventory and Accounts Receivable in your books while billing the customer for the correct item and amount and the customer returns the incorrect Product Y.
o Discounts given after the invoice is issued: You sent an invoice for $1000. The customer then informs that a discount may be given by waiving $100 so that he will make payment
of $900. Once this is agreed, you would issue a credit note for $100 towards the adjustment of discount given.
o To Write-off Customer Short Payments: You send an invoice for $2000. The customer sends you a payment of $1995 only. You do not intend to recover the shortfall and hence your books indicate that $10 is yet to be recovered. To writeoff this amount a credit note is issued.
Amount can be refunded to the buyer on the basis of credit note or the buyer can apply that credit note to another invoice.
Example: Credit note in case of Discount Discount Account Dr. To Debtors (Goods returned by the customer with reference to credit note no. ---------)
Note: FTE should differentiate between debit note, credit note or invoice. Generally the mistake happens due to of lack of awareness or if the document is in vernacular language (in this case FTE should translate it in English or check with the knowledgeable person). When we receive a debit note from the other party, we account it like a credit note. This is because when he debited our account in his books we need to credit his account in our books.
C. Managing Chart of Accounts
The chart of accounts (COA) is a listing of all accounts in the general ledger, each account accompanied by a unique reference number. The list is naturally arranged in the order of the customary appearance of accounts in the financial statements. To set up a chart of accounts, one needs to define all the accounts to be used which should have an exclusive number to identify it. Every account in the chart is classified into various categories like asset, liability, equity, revenue, expense. Separation of individual accounts by several numerical places allows multiple new accounts to be placed between existing ones. For example, in small companies, the accounts are grouped according to type and then numbered usually using the following convention:
Asset 101-199
o 100-109 Cash
• 101 Cash - Regular Checking
• 102 Cash - Payroll Checking
• 103 Cash, Change, or Petty Cash Fund
o 110-119 Receivables
• 111 Accounts Receivable
• 112 Due from Employees
• 113 Notes Receivable
o 120-129 Property, Plant, and Equipment
• 121 Land
• 122 Buildings
• 123 Equipment
• 124 Vehicles
Liability 200-299
o 200-209 Current Liabilities
• 201 Notes Payable - Credit Line
• 202 Accounts Payable
• 203 Wages and Salaries Payable
• 204 Taxes Payable
o 210-219 Long-term Liabilities
• 211 Mortgage Loan Payable
• 212 Bonds Payable, due 2015
• 213 Discounts on Bonds Payable
Equity 300-399
o 300-309 Stock
• 301 Preferred Stock
• 302 Common Stock
• 303 Retained Earnings
Revenue 400-499
o 400-409 Product Sales
• 401 Store #1 Sales
• 402 Store #2 Sales
• 403 Store #3 Sales
o 410-419 Other Income
• 411 Interest Revenue
Expense 500-599
o 500-509 Insurance
• 501 Disability Insurance
• 502 Property & Casualty
o 500-509 Interest Expense
• 501 Finance Charge
• 502 Loan Interest
• 503 Mortgage
In larger companies, account types and account numbering could be something such as: asset accounts (1000+), liability accounts (2000+), equity accounts (3000+), revenue accounts (4000+), cost of goods sold (5000+), expense accounts (6000+), miscellaneous revenue (7000+), and miscellaneous expenses (8000+). Complex businesses may have few thousands of accounts and may require longer account reference numbers so that new accounts can be added without duplication or recycling the reference numbers. It is necessary to plan while assigning the account numbers in a systematic and logical way keeping in mind any specific industry standards. Managing COA involves different activities like:
1) Addition/Modification of Department/Cost Center
As business grows, the departments or cost centers are split for enhanced operation efficiency. In order to track transactions with respect to different SBUs or cost centers, new codes would be created in COA by the general accounting team. The process of addition or modification of COA follows pre-defined set of steps and may require an approval by concerned manager.
2) Enabling/Disabling Account Codes
General accounting function is responsible to enable and disable account codes. To answer the question why enabling and disabling of account codes is required, it could be said that certain accounts are created for specific purpose, and they may become irrelevant once the purpose is fulfilled. In such a scenario, these accounts need to be disabled. Similarly, an account which has been disabled may be required to be enabled again. Therefore, the general accounting team is responsible to perform these tasks.
3) Mapping Local COA to Global COA
General accounting team is also responsible to map local COA to global COA whenever there is a change to global COA. In fact they are responsible to ensure to note upfront if any modification is required to global COA to meet the local statutory/reporting requirements, and incorporate the same onto the changed global COA.
Key Risk Indicator Modifications/Amendments to Chart of Accounts without approval
Key Performance Indicators
Time to process GL master date requests
Unused account codes in Chart of Accounts identified and deactivated yearly
D. Identification of key accounts and review at regular intervals
Few accounts will be key or sensitive accounts for the company. These key accounts will differ from company to company and should be regularly monitored. Example could be: cash and bank account, investment account, share capital, AP/AR sub account, auto debit and direct debit account and few expenditure account, intercompany account, accrual account, tax account, etc. Note: AP sub account: It is an intermediary account which is used for a payment proposal and settlement. Entries Entry for Payment proposal Vendor A/c Dr. To AP sub A/c Entry for Actual payment from treasury AP sub A/c Dr. To Bank A/c With the above two entries, the AP sub account balance should be zero. If there is any balance it needs to be researched.
Cr. balance indicates that the payment proposal is done but the payment has not been disbursed to the vendor. There are two alternative to solve this: first to request treasury to make the manual payment and post the transaction in AP sub account; second: reverse the payment proposal entry in the particular vendor account then it will be picked in the next payment proposal.
E. Allocation of Shared Services Costs
Depending on business structure or method of operation, some organizations have shared service centers. Although, shared service centers have their own cost center, however, their total cost is split across other cost centers which avail the services of these shared service centers. Similarly, some business organizations consider their head quarter as enabling function, and like to allocate the cost across various business units.
In such scenario, it is the general accounting function which splits these cost based on business policy and charge it to relevant business units. This activity is purely for internal business management, and does not influence the financials of the business as a whole.
F. Consolidation and Reporting
General accounting department is also responsible for preparing the statutory report as well as management reports for individual departments/divisions/line of business.
Input: 1. Closing Schedule 2. Financial Data from Individual Units 3. Data from Financial System to be uploaded Process: Retrieve final financial figures from the Financial System and start preparing the Financial Statements in the required format. In case of consolidated Financial Statements, collect all necessary financial figures and quantitative data from the various business units, e.g., subsidiary and associate companies and joint venture. Master Data is maintained to ensure that information/data has been received from all applicable subsidiaries and that all relevant entities have been included in the consolidation process. The activities include:
a) Validation of balances retrieved with those appearing in the system,
b) Elimination of all inter-company balances,
c) Matching of balances as disclosed in schedules with those reported as part of Balance Sheet and Profit & Loss Account,
d) Giving necessary break-ups for reported balances as required statutorily (for instance age wise break-up of outstanding debtors – Details for these may have to be received from the Client,
e) Disclosing Balances net of provisions,
f) Presenting Fixed Asset Data in the format required etc)
Once all the data are received and figures are reconciled with the financial systems, various reports can be generated. Output: Financial Statements
Key Risk Indicator Number of un-reconciled account balances beyond the period close date Standard reports not generated within the closing calendar
Key Performance Indicators Cycle Time for reporting to client management Percentage of standard reports generated and distributed within the scheduled time Percentage of ad hoc reports created, run and distributed within the committed run time.
II. General Accounting – Control Activities
Some areas that warrant active engagement of general accounting team from financial control
objective are:
A. Account processing cycle
1. Accounting Equation
The accounting equation underlies the process used to capture the effect of economic events. The
equation (Assets=Liabilities + Owners’ Equity) implies an equality between the total economic
resources of an entity (its assets) and the total claims to those resources (liabilities and equity). It
also implies that each economic event affecting this equation will have a dual effect because
resources always must equal claims to those resources.
2. Journal
After determining the dual effect of external events on the accounting equation, the transaction is
recorded in a journal. All the journal entries will have a debit and a credit and the debit amount
should match the credit amount.
3. General Ledger
The next step in the processing cycle is to periodically transfer, or post, the debit and credit
information from the journal to individual general ledger accounts. A general ledger is simply a
collection of all of the company’s various accounts. Each account provides summary of the effects
of all events and transactions on that individual account. This process is called posting. An
unadjusted trail balance is then prepared.
4. Adjusting entry
All the day to day transactions are recorded in the books of accounts as and when they take place,
such as cash transactions, incomes and expenses. But some transactions, which are not occurring
every day and which require only accounting adjustment are not recorded throughout the year.
Such unrecorded transactions are to be adjusted at the end of an accounting period while
preparing financial statements. For example, depreciation, prepaid expenses, income received in
advance, outstanding expenses.
Adjusting entries are required to implement the accrual accounting model. More specifically,
these entries are required to satisfy the realization principle and the matching principle. Adjusting
entries help ensure that all revenues earned in a period are recognized in that period, regardless
of when the cash is received. Also, they enable a company to recognize the all expenses incurred
during a period, regardless of when cash payment is made. As a result a period’s income
statement provides a more complete measure of a company’s operating performance and a better measure of predicting the future operating cash flows. The balance sheet also provides a more complete assessment of assets and liabilities as source of future cash receipts and disbursements. In summary, we can say that Adjusting entries are journal entries usually made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred.
