I've spent some time over the past year writing about how to build cloud applications. Now I’d like to take a short recess and write about another topic near and dear to my heart: the general ledger. I’m sure I just lost half of you&mdash probably more. But stick with me.
The general ledger (GL) is not exactly the kind of topic that attracts a huge readership, but read on and you’ll see the beauty in the simple elegance of “debits equal credits” and “assets equals liabilities plus owners equity.” To most people, the general ledger is that boring class you have to take to get through business school, but really the general ledger is the answer to many business riddles.
The general ledger has been around for centuries accomplishing two tasks that sound simple, but in their implementation are actually quite difficult.
- First, the general ledger allows you to track values over time. It’s easy to get a balance in an account today, but to get a balance in an account on any day historically requires some sophistication.
- Second, the general ledger knows the difference between a balance and a change in balance.
We all learned the three basic financial statements when we went through our accounting curriculum. The income statement reflects the revenue and expenses in a given period that affect owner equity. The balance sheet shows balances in assets and liabilities at any point in time. But what makes a general ledger magical is the statement of cash flows.
A true general ledger can take the starting balance in a period for cash accounts, show the impacts of revenue and expenses for the period (this is the change I referred to above) and show the ending balance for the cash accounts in a way that ties out beautifully. It’s surprising how many low-end accounting products struggle with this concept. If you want a litmus test to separate the fake GLs from the real GLs, see if the GL can create a statement of cash flows using the cash-method.
As valuable as the GL is, no one has taken the time to innovate it so it can reach its full potential. And I have a theory as to why: I believe that over the last couple decades, all the innovation in GLs has been created by accounting software users—not accounting software vendors. Accounting software vendors simply listened to what the users wanted and blindly gave them exactly what they asked for without understanding why.
It’s time for vendors to step up and contribute to the innovation of the GL. Accounting systems have gotten very good at producing financial reports, but the power inherent in the GL has been overlooked. Companies are looking for more mature systems that will allow them to manage their financials the way they want, without being forced into a box created by a vendor’s limited capabilities. Users want more sophisticated functionality that aligns with the way they run their businesses, such as:
- The ability to run financial reports over various sets of data
- Company-specific dimensions that can be budgeted, managed and tracked
- Tracking business results that fall outside of the confines of GAAP
The remainder of this blog series will discuss how we can meet these more mature organizational needs and how vendors can turn the slow evolution of the GL into a revolution while creating real business value for their customers.
People often joke when they see how passionate I am about the general ledger. Honestly, I don’t blame them. But if you manage to stick with me through this series, I suspect you will appreciate the simple beauty of how the trial balance ties out perfectly every bit as much as I do.
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