Financial Accounting

How the pieces fit

The general ledger is the destination. The subledgers — payables, receivables, cash, assets — are where transactions originate, carry their own detail, and then summarise into the ledger. Getting this relationship right is most of what financial accounting design actually is.

• General ledger: The single chart of accounts, the periods, and the balances that feed statutory reporting.
• Accounts payable: What the business owes suppliers, and the controls around approving and paying it.
• Accounts receivable: What customers owe, and the discipline of collecting it.
• Cash management: Where the money actually is, and what it will be tomorrow.
• Asset management: Capitalised items, their depreciation, and their eventual disposal.

A useful test during design: for any number on the face of the financial statements, can someone trace it back to the source transaction without leaving the system? If not, the subledger-to-ledger design has a gap in it.

The month-end close

Close is where financial accounting design is judged. A well-designed system closes because the controls ran during the month; a poorly designed one closes because people worked a weekend.

1. 01

   Cut off the subledgers

   Stop new transactions posting into the period being closed, in a defined order.

2. 02

   Complete subledger processing

   Finish invoice entry, receipting, depreciation runs and bank reconciliation.

3. 03

   Post subledgers to the ledger

   Transfer and confirm that subledger control accounts agree to the ledger balances.

4. 04

   Process adjusting journals

   Accruals, prepayments, provisions, reclassifications and intercompany entries.

5. 05

   Reconcile balance sheet accounts

   Evidence each balance against a supporting schedule, not just against last month.

   • Reconciliations should be prepared and reviewed by different people.
   • Unexplained differences get aged, not written off quietly.
6. 06

   Review and close the period

   Management review of the result, then hard-close so the period cannot be reopened casually.

7. 07

   Report

   Statutory, management and regulatory reporting from the closed position.

Where implementations go wrong

• The chart of accounts carries too much: Dimensions that belong in cost centres, projects or analysis codes get built as accounts, and the chart becomes unmaintainable.
• Subledger detail is duplicated in the ledger: Posting at invoice-line granularity bloats the ledger and slows every report that touches it.
• Periods are left open: Soft-closing forever means the prior month's numbers keep moving after they have been reported.
• Reconciliations are manual by design: If nobody configured automated matching, the close will always be a headcount problem.
• Segregation of duties is retrofitted: Roles designed for convenience during UAT become the production security model.

Metrics and KPIs to track