As a business owner, you know your business better than anyone; you live it and breathe it. So when it comes to creating a general ledger, you should be the one to determine your chart of accounts structure and protocols. After all, you are the authority on your business’s financial activities.
Unfortunately, far too often general ledgers (GL) are set up to make the processes of preparing year-end GAAP financial statements and filing income tax returns easier. Those are once-a-year activities, whereas running your business is an everyday activity. Organize your GL to give you better operational information, even if it complicates the year-end financial statement and tax return processes.
Your general ledger is, in many ways, a database. Like all databases, your GL will be only as useful as the data captured. Capturing irrelevant or low-value information will only add to the overall cost of getting the information you truly need. The key is to organize your GL in a way that turns data into information.
Here are some things to consider about how to organize and use your GL:
Account Structure and Detail. The old saying is “begin with the end in mind.” So think long and hard about what kind of information you want from your GL and how you want to get it.
For instance, do you want to be able to have an income statement that cleanly and logically “rolls” up accounts such that you can present a single page?
Knowing what your accounting software can and cannot do is critical. The more sophisticated your software is, the less likely it is that you will have to rely on GL accounts as your only way of categorizing and reporting data.
In the end, your accounts and structure need to support how the business is run today. If you are still using roughly the same accounts and structure from 10 or 15 years ago, it is probably time to give your GL detail and structure a hard look.
Data Entry Rules and Budgeting. Hopefully, one of the reasons you maintain GL account detail is to help you create and monitor budgets. To that end, it could be wise to have data entry rules that help you monitor how well you are doing against your budget.
One-time or special items can be segregated from their typical accounts if they were never contemplated in your budget and therefore should not be considered an ongoing item for next year. GAAP or tax rules may require these items to be reclassified at year-end, which is a simple one-time adjustment your CPA can assist with and will not affect your budget or other analyses from your system.
Account Reconciliation. Combining too many or too few items into balance sheet accounts can create unnecessary reconciliations, errors, or both.
The most common error to avoid is recording manual entries into sub-ledger control accounts. Leaving these accounts pure can make it easier to ensure that the GL balance matches the underlying detail report at all times. So for example, if you have to manually record sales or payments as part of your closing process, you should maintain separate account numbers to make these manual entries and accounts stand out. This will greatly simplify the reconciliation process and make it far less likely that you “forget” to reverse or update those manual items.
The best rule to follow is to maintain separate GL account numbers only when doing so will create less reconciliation effort. For example, combining loan accounts into one account will require a separate spreadsheet to “reconcile” those accounts to bank statements or amortization schedules. If those accounts were maintained as separate account numbers, they should always match and no reconciliation should be needed.
Nonfinancial Data. Nothing is stopping you from tracking data in your GLs that will help the users of your GL information understand them better. If your business runs on a metric of certain costs per hour or per pound, it may be useful to capture that data in your ledger so you can automate the calculation of that metric.
Intercompany Accounting. One of the most challenging decisions to make is when to “separate out” a portion of your business or, conversely, when to combine it. A significant factor in that decision-making process is the accounting effort it will take to keep a separate GL. Maintaining separate companies can be quite burdensome in some GL systems.
While not widely done, multiple companies can be maintained in one GL company, provided the accounts are segregated. To further simplify things, intercompany accounts can be skipped in favor of a once-a-year true-up process. Before combining GLs, seek the advice of your CPA and attorney. If it makes sense for you, a tremendous amount of time can be saved.
Collaborate With Your CPA. You’re the expert on your business. Your CPA is the accounting expert. Together you can ensure your general ledger works for your business. Have ongoing conversations and discussions to ensure you’re recording all transactions and activities in the most optimum places, while maintaining awareness of potential financial and tax implications.
A total overhaul of your GL is a big undertaking that is rarely done outside of switching accounting systems. That said, when switching systems, most companies do a complete overhaul of their GL structure. This tells us most people update their structure only when they have to, not when they should. This can lead to missed opportunities of efficiency and cost savings.
A well-laid-out GL structure will make your financial statements more usable, give you greater insight into your business, and allow you to make better decisions for stronger profitability and growth.