Early accounting systems incorporated a rigid general ledger (GL) structure that mirrored the paper ledger format accountants were used to. Several decades later, and despite major advances in technology, many accounting systems still use this same basic format. Yet, this approach has severe limitations. Today's business are far more reliant on data than they once were. This is where the static GL begins to break down.
The Static General Ledger
The general ledger is the primary repository of financial data within an organization and is the system of record for all transactions. GL software includes a chart of accounts (CoA) that allows transactions to be grouped into different categories and subcategories for reporting purposes. The first few digits of an account code indicate whether a transaction is related to assets, liabilities, equity, expenses or revenue and what subcategory it falls into (e.g. current assets, fixed assets, etc.). This is all the information required to produce standard financial reports.
If this were all that was required of the chart of accounts, then a static GL like this might suffice. This is rarely the case, however. Because data is so valuable, companies frequently use these account codes to capture other details as well. For instance, they may want to report expenses by department or sales by region. This means creating more and longer account codes. Over time, what started out as 30 or 40 account codes becomes hundreds or thousands. The chart of accounts becomes hard to work with and deciding where a transaction belongs becomes difficult—resulting in frequent misclassifications.
Another limitation of a static general ledger is that, even with a bloated chart of accounts, they can't provide the level of information business leaders really need. Eventually, companies using these systems reach a point where they simply can't expand the chart of accounts, either due to the software itself or because the benefits of adding to the chart of accounts are outweighed by the risk of errors. Once this point is reached, gaining new insights becomes much more difficult.
The complexity of the chart of accounts also affects the ability of the accounting team to perform one of its most important duties – closing the books and producing accurate financial statements. Accounting staff wind up spending an excessive amount of time identifying and correcting errors, preventing them from focusing on other tasks. These delays can have serious consequences. Timely reporting is essential for effective management and helps ensure stakeholders are kept up to date about the performance of the business. Delayed or inaccurate reports are often a sign of trouble and can hurt efforts to secure a loan or other financing.
The Dynamic General Ledger
The nature of business has changed dramatically over the past several decades. The limitations of the static GL model make it ill suited to today's environment. What's needed is a more flexible approach: a dynamic general ledger that can be tailored to meet unique business requirements and adapted as those needs change.
A dynamic GL is more than a record of transactions. It is an automated solution designed to increase efficiency by eliminating repetitive manual processes, like creating journal entries and reconciling bank statements, which saves time and minimizes manual data entry, a common source of errors. Automation also eliminates the need to perform complex calculations in spreadsheets or by hand. Revenue recognition, depreciation, accruals and other calculations required for accurate bookkeeping should be configurable to ensure consistent reporting.
Because data is such a critical asset and a key source of competitive advantage, the dynamic general ledger also incorporates sophisticated business intelligence capabilities and multi-dimensional analysis, helping companies better leverage the data they have access to. Multi-dimensional analysis, for instance, allows organizations to combine financial and operational data to track business performance at a more granular level, which can lead to new insights that improve performance.
These capabilities have a dual benefit. They eliminate the need for a complex chart of accounts, which saves time by reducing transaction coding errors. More importantly, they free accounting staff from much of the burden of creating operational reports by eliminating the need to access the GL. Business intelligence tools can give operations personnel with the appropriate permissions limited access to financial details for reporting.
As businesses evolve, they often need to adopt new accounting processes. When expanding into a new market, for instance, companies may need to comply with multiple accounting standards. Accounting for a single transaction in multiple ways is difficult for companies operating with a static general ledger system. It typically means exporting data into a spreadsheet and making manual adjustments to comply with local accounting standards. Like other manual accounting operations, this is a time-consuming, error-prone process.
Companies that operate subsidiaries face a similar problem. The static GL structure wasn’t designed for multi-entity accounting. Organizations with subsidiaries wind up implementing multiple accounting packages. This makes closing and consolidating the books at the end of a reporting period a time-consuming process. The dynamic general ledger overcomes both of these issues by allowing companies to manage multiple sets of books within the same system.
Responsive, Agile Businesses Need Maximum Flexibility
NetSuite’s dynamic general ledger gives companies the flexibility, insight and control they need to adapt to ever-changing business requirements. With NetSuite, organizations can tailor accounting data and processes to meet their specific needs. No more struggling with a predefined, one-size-fits-all structure that doesn't work for your business. With NetSuite you can customize account formats, transaction details, GL impacts and more.
Multidimensional analysis gives companies the ability to analyze financial performance across a virtually unlimited number of business segments. With increased insight into daily operations, organizations are better equipped to respond to unexpected increases or decreases in demand, supply chain disruption and other conditions.
NetSuite also increases efficiency by automating journal entries, bank reconciliation and other mundane tasks. NetSuite also automates amortization and depreciation schedules, P&L allocations and other routine calculations, eliminating the need for cumbersome spreadsheets.
As companies evolve, their accounting requirements change. Activities like entering a new market, expanding internationally, acquiring subsidiaries or launching a joint venture create new accounting challenges. NetSuite's dynamic general ledger helps companies meet these challenges with multi-company, multi-currency and multi-tax functionality, as well as support for multiple accounting standards, using a single general ledger.
Watch this webinar to learn more about the capabilities of the NetSuite general ledger.