All businesses or organizations deals with large number of transactions (financials and non-financials) depending upon the size of organization. Financial transaction comprises the transactions which are of financials nature, like purchasing, sales, payment to suppliers, receipt from customers, etc., that impact the organizations book of accounts. This books of accounts referred to as ledger.
A ledger consists of posted balances that represents a set of books for a business unit. Maintaining of ledger is very must in every accounting system, as it keeps record of all the financials transactions on daily basis and provide all information for the preparation of company financial statements.
Ledgers and Subledgers
Sub ledger is the subset of General ledger in the accounting terms. The relation between sub ledger to general ledger is many to one. i.e. there can be multiple sub ledger accounts linked to same general ledger account.
In general terms, General ledger refers to the Chart of Account master and Sub ledger refers to the sub master of accounts which are linked to the main chart of account through posting profiles.
Oracle Fusion Subledgers capture detailed transactional information, such as supplier invoices, customer payments, and asset acquisitions. Oracle Fusion Subledger Accounting is an open and flexible application that defines the accounting rules, generates detailed journal entries for these subledger transactions, and posts these entries to the general ledger with flexible summarization options to provide a clear audit trail.
For example, Company ABC has 100 suppliers which linked to different supplier accounts. Company wants to maintain only one supplier account at chart of account level but at the same time wants separate tracking of transaction details of every supplier account as well. Here company will maintain the details of all the supplier accounts at sub ledger level and link all the sub ledger accounts to the main payable ledger account at general ledger or chart of account level. In this way if company wants to check its net payable balance, it will refer to the main account at chart of account level and if it wants to check the balance of a specific supplier account, it will refer to the sub ledger level.
Primary ledger is the main record keeping ledger and a required component in the system configuration. The accounting configuration is uniquely identified by its primary ledger. Primary ledger records transactional balances by using 4C’s. The 4C’s indicates the four pillars of the accounting configuration, that decides which, how, where and when to record each transactional balances. The 4C’s are:
- Chart of Accounts
- Subledger Accounting methods and rules
To determine the number of primary ledgers, your enterprise structure analysis must begin with your financial, legal, and management reporting requirements. For example, if your company has separate subsidiaries in several countries worldwide, enable reporting for each country’s legal authorities by creating multiple primary ledgers that represent each country with the local currency, chart of accounts, calendar, and accounting method.
Generally, big organizations operating globally requires more than one ledger due to the statutory and strategic requirements, referred to as secondary ledger and reporting currency ledger. Each legally authorized company must have only one primary ledger and other ledger required due to strategic requirements is referred to as secondary ledger or reporting currency ledger.
A primary ledger is defined as a ledger where all your day-to-day transactions are performed and you would typically have a secondary ledger to reflect these same transactions in one of the following probable scenarios:
- Currency (also called a Reporting currency ledger)
- Chart of Accounts
- Subledger Accounting methods and rules
A secondary ledger is one that would, in most cases, replicate the transactions from the primary ledger so that these transactions can be adjusted and can be reported for specific financial or management purposes. The secondary ledger can also have a different accounting basis or a different Chart of Accounts.
There is no defined upper limit to the number of secondary/reporting currency ledgers company may have, though more than three is expected to cause performance issues for data handling.
The secondary ledger (including a reporting ledger) is configured at the same time when you define the primary ledger or can be added later. By default, the first ledger define is termed as primary and then company can attach secondary/reporting ledgers as needed. If the secondary and reporting ledgers are added at this time there is always a benefit as they will all be in sync from the beginning.
As in most cases the reason for attaching the secondary ledgers (and reporting ledgers) is to assist in reporting, it is advised to configure these at the same time.
Reporting Currency Ledger
Reporting Currency Ledger maintain and report subledger and general ledger journal entries or balances in additional currencies. Each primary and secondary ledger is defined with a ledger currency. Reporting currency ledger:
- Records business transactions and accounting data in additional reporting currency
- Create, record and close a transaction in the same currency to save the processing and reconciliation time
- Helps company to conform to local requirements, for example, paying transaction taxes is easier using a local currency.
Company ABC runs their business from USA, where the currency is USD. ABC operate in many global locations, including India where the currency is INR. Company ABC wants the financial statements to be presented in USD and INR, and their transaction recording happens only in a single currency, i.e. business which operates in India also records transactions in USD only, for the sake of local reporting the reporting alone would be done in INR.
From the look of it, reporting transactions recorded in USD as INR seems to be achieved using Reporting Currency Ledger as this is the basic purpose of the Reporting Currency Ledger.
But the world in which we are doing business is more complex than what we think. When there are multiple countries in which organization is operating, we have to look into various factors and in the current example:
- both country follows the different accounting calendar cycle, USA follows the accounting period from JAN to DEC, whereas in India the accounting period is from APR to MAR.
- Chart of Accounts remained the same, hence no change on this front.
- The accounting entries that would be generated for the reporting ledger should be modifiable, i.e., configurable using Subledger Accounting rules. So we should use a ledger type which allows us to modify the account derivation rules.
Reporting Currency Ledger cannot handle different calendars and will not have an accounting method on its own, it will share the same calendar and accounting method used by Primary Ledger.
So if you are using a reporting ledger in your organization and want to make the system generate accounting entries differently for reporting ledger alone, it is not possible.
So to overcome all this organization will go for secondary ledger with conversion level as Subledger. Secondary ledgers allow to have a different currency, calendar and accounting method which meets the objective and also the transaction will be recorded only once, there is no need for duplication of transaction entry with Secondary ledger, it is only the accounting entries that will be replicated in a different representation.
Next hurdle to choose conversion level. If organization choose journal level conversion, it makes accounting method selection redundant, i.e., if you are going to transfer entries from Primary Ledger to Secondary Ledger, you do not need a subledger accounting method at all, as there are no subledgers that were involved. So to make use of subledger accounting method, organization should opt for subledger level of accounting and made a dedicated accounting method for secondary ledger alone, which now provides the option to the business user to change the accounting for secondary ledger as per their requirement. you can find more information about Oracle fusion financials training here.