Maintaining accurate accounting records means more than checking every box on your list at month-end close. Without accuracy in your underlying recording, you’ll never know if the financial reports you compile are accurate.
Since a modern accounting department may be responsible for recording thousands of monthly transactions, how do they ensure their records accurately reflect the recent week’s activities?
Accountants use the general ledger to track every dollar that flows into or out of the company. Organizing such data is vitally important, and the general ledger (GL) coding system ensures every transaction is recorded and categorized correctly.
Today we’ll cover all the basics of GL coding, including:
- What is a general ledger?
- What is a general ledger code?
- Why is GL coding important?
- What are the steps for accurate GL coding?
- How can software improve the accuracy of your general ledger?
What is a GL code?
A general ledger or GL code is a unique identification code that allows businesses to classify and track their financial activity. It helps organizations record information on purchases, sales, and other transactions to create more accurate accounting records.
Every entry has its own GL code for proper tracking and classification, making it easier to account for all financial activity within the company.
What is the general ledger?
The general ledger is the record-keeping system businesses use to track and store financial transactions. It’s a comprehensive summary of an organization or company's income, expenses, assets, and liabilities.
The general ledger (GL) is typically divided into separate accounts for each type of transaction. These include cash, expense accounts, accounts receivable, inventory, accounts payable, loans, reimbursement, and more. These accounts are indexed in a report or document called the chart of accounts.
Why GL coding is important
GL coding is an essential aspect of accounting and financial tracking. It lets businesses categorize and organize their transactions. This makes it easier to identify areas of concern and potential sources of revenue.
Despite the importance of GL coding for smooth financial operations, some reports estimate that up to 20 percent of shipments may have incorrect GL coding. This robs an organization of spending visibility, creates issues with month-end close, and potentially leads to recording and payment errors.
By assigning each transaction its own GL code, an organization tracks what departments spend, the amounts of individual transactions, and line-level spend data. Accurate GL coding allows better spend analysis and trend spotting within the financial organization.
Top 7 benefits of accurate GL coding
Accurate financials: Correct GL coding is the basis for accuracy in reporting. Recording every transaction ensures accuracy in month-end close and associated financial reporting.
Cost optimization: Accurate GL coding lets you scrutinize every transaction and spending category. This enables you to analyze spend, adjust budgets, and ensure spending on materials and supplies falls within expected benchmarks.
Better budgeting: Visibility lets you see what every department spends in relation to the revenue it generates. You can use this data to customize budgets and make decisions about cash allocation. It also helps you understand the effectiveness of different departments.
Improved stakeholder relations: With granular visibility, stakeholders benefit from a clearer understanding of your financial position. This builds confidence in their relationship with your organization.
Increased efficiency: Accurate GL coding reduces the number of human errors that occur in month-end close and other financial statements. Fewer errors translate to less research and correction and more time for focusing on higher-value projects.
Better tax reporting: GL coding enables auditing and tax compliance, as it’s easier to trace transactions through a strict GL account code hierarchy. This clarifies that everything is correctly reported and accounted for throughout the fiscal year.
When a company does not use GL coding, tracking how much money is being spent and where it’s going is harder. It also becomes more difficult to spot problems or find new sources of cash.
How to assign general ledger codes
General ledger codes work on a descending system, from the largest natural numbers (say, 1000) for general categories like sales, overhead, salary, benefits, or loans, to specific numeric markers for individual transactions.
For example, a company selling computer parts may assign GL code 1000 to all revenue accounts. Costs for building those parts may be placed in GL code 2000. Shipping and handling costs would be under their own GL code, 3000, and so on. The most crucial aspect of GL coding is that all transactions have a code corresponding to the correct activity and area.
Assigning GL codes is an important task within the accounting department. Administrators must ensure everyone responsible for recording transactions adheres to the prescribed GL organization and taxonomy. Doing this helps validate accuracy in the overall financial reporting.
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Examples of GL coding
The best practice in GL coding is assigning each transaction a GL code corresponding to its established chart of accounts. Think of it as an address that brings you to the correct version and section of the account.
Say you build electronics and have an assortment of regular component expenditures. You may have them all sorted under GL category 5000 - components. You can then categorize the type of component individually:
5100 - transistors
5200 - heat sinks
5300 - epoxies
5400 - wiring
5500 - CPUs
From there, components within each category can be further defined and organized into the correct type within the chart of accounts. You can also break them down into projects, vendors, or any sub-category that makes sense for your general ledger account structure and accounting needs.
For example, CPUs may be broken down into the products they’re used for, such as:
5510 - laptops
5520 - desktops
5530 - tablets
5540 - cell phones
You can further differentiate between different components within the GL to gain granular specificity about every transaction.
Automating the GL code
Software and AI have made it much easier to automate GL transactions and ensure accurate coding. Automation designates a key field in previously coded invoices to recognize relevant GL codes and organize new transactions. AI’s ability to identify each transaction makes it easier for software to code them correctly.
Why automate the GL?
Manual entry of the GL takes time and introduces problems. Companies who automate their coding realize many benefits:
- Reduced manual effort that saves the accounting team valuable time and allows them to work on higher-priority projects
- Fewer coding errors, minimizing the need for research and corrections in the GL
- Faster and easier assignment of codes for individual transactions, improving processing speeds
- Increased visibility into financial data, allowing better spend analysis and decision-making
- Easier tracking of expenses across projects, vendors, or other subcategories for improved budgeting and forecasting
Experience better GL coding management with Order.co
Order.co allows companies to accurately catalog their financial transactions with less manual accounting work.
Robust coding automation ensures that every transaction is accounted for and properly reported in the GL. Line-level coding provides all the benefits outlined above and ensures accurate reporting and confidence in decision-making.
Order.co provides numerous features to support accurate GL coding:
- Automated invoice coding: Eliminate manual data entry errors and speed up invoice processing times by automatically pre-coding your invoices. Every Order.co invoice contains perfectly coded, granular spend data.
- Accounting automation: Improve data accuracy and decrease invoice processing time with automated GL coding at the time of purchase and effortless 3-way matching upon receipt of goods.
- Reporting features and integrations: Facilitate spend analysis and data sharing between all your most important software tools.
To see Order.co’s software and GL coding capabilities in action, schedule a demo today.
Schedule a demo to see how Order.co can simplify buying for your business.
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