A General Ledger for All Seasons

You use your accounting GL year-round; why not apply the same principles to CPM processes?

‍As an accountant I’ve become very familiar and comfortable with using various General Ledger (GL) software solutions, which are the last piece in an ERP or accounting software packages. I have even been lucky enough to work on a completely manual (paper based) GL where all subsidiary ledger data and manual journal entries were summarized and account balances were manually brought current as a result of every transaction. I suspect the term Trial Balance came from these manual accounting systems where balancing the books was a process of trial and error. I say I am lucky because it made me appreciate all automated GLs and other accounting modules, something I’m sure many accountants and software users take for granted. Often I see accountants at client companies struggle to make a correcting entry in a subsidiary ledger, particularly when the accounting period into which the correction must be posted is important. When things don’t work out the way they should I normally suggest to take care of these issues by making manual journal entries directly into the GL. This is a place where authorized users can post entries into any open period using the available GL accounts to construct the entry.

The GL is where all company accounting transactions flow into and update account balances in each accounting period (e.g. month). Account balances either go up or down during the period; some do not change in certain periods and some are never used. Certain account balances are used to construct the company’s balance sheet and other accounts use the activity during the period to construct the Income Statement. In a computerized system all accounting rules are built-in and users in sub-ledger modules (e.g. AR, AP, Inventory) cause their daily transactions to process using these built-in rules while updating all applicable GL account balances. The financial reporting process uses its own built-in rules and formats to construct the required financial statements using account balances (trial balance data). In more complex situations, two or more entities’ financial statements are combined in order to produce consolidated financial statements. Here, other rules (e.g. eliminations) are employed. In theory, all accounting rules, including those used in financial statements consolidations should be built into the system, although in practice, some of the more complex situations still require data manipulation outside the GL.

When thinking about the automated GL system used to process and provide the needed reports (e.g. financial statements for closed periods) using actual transaction data (accounting events that have already occurred), one must wonder why not apply these principles to future, forecasted data. After all, the purpose of business data forecasting and budget preparation is to create a plan where anticipated, future financial results, are outlined and communicated to company managers and other stakeholders via a formal budget. What if we borrowed actual GL principles and used them in a separate GL where future transactions, derived from our forecasting data, presented in a budget, helped create future period financial statements such as an Income Statement, a Balance Sheet and a Statement of Cash Flows, all of which looked exactly like our actual financial statements, except for the data values?

To take it a step further, if this proposed system acted like an actual accounting GL, it follows that each change to the underlying data (transactions) would automatically modify all relevant forecasted financial statements, exactly like their actual counterparts. Earlier I said I was lucky to work with manual GLs which helped me appreciate all automated accounting systems. I am also very fortunate to work with a CPM (Corporate Performance Management) software solution that has this described GL at the core of the software. With this architecture and built-in accounting rules, future period financial statements are a reality. I am glad to see that this solution is available for medium size and smaller companies where you often don’t encounter sophisticated accounting and finance operations. When you use this system year round for all CPM functions (planning, budgeting, forecasting, analytics) you begin to realize how handy this All-Season GL really is.

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Alan Hart, MBA, is Principal Consultant at Pacific Shine Group in Portland, Oregon, with responsibility for client business development and hands-on client project implementations. Prior to starting Pacific Shine Group, he worked in various executive accounting and finance positions with technology and growth companies. Notable is his 18 years in the hi-tech manufacturing industry where he served as Controller, Vice President of Finance and CFO of several privately as well as publically held companies in the Hi-Tech industry, such as Hybrid Arts, Inc. Hamilton Bay Associates and Syncronys Software. In his role in management consulting, Alan has worked in diverse industries and with a variety of clients, including fortune 1000 companies such as Boeing, Delta Airlines, Intel, Wyndham Worldwide and others, as well as many mid-market organizations such as Guitar Center, Ducommun AeroStructures, Cypress Semiconductor, TriQuint Semiconductor and others.

Combining his skills and experience in engineering with deep understanding of technical accounting, he is able to assist small and medium-size manufacturing companies establish GAAP compliant accounting and reporting systems.