General Ledger Code: A Complete Guide

General Ledger (GL) codes are a numerical organizational system that helps rapid categorization and recording of a company’s financial transactions. 

Assigning GL codes to any transaction is critical for preparing a company’s financial statements. GL code assignment helps identify why a transaction has been made and how it should be accounted for. This gives you deep visibility into where your funds are going, and performing cost-cutting becomes a breeze. 

What is a General Ledger?

General Ledgers (GL) are a company’s record keeping system which categorizes each type of transaction into separate accounts. These accounts include accounts payable, receivable, expenses, income, inventory, and more. 

What is a GL Code?

GL codes are unique alphanumeric codes assigned for each account in a company’s general ledger. It consists of a series of numbers and alphabets used to categorize spending. It is a straightforward method of identifying and classifying a transaction. This helps you determine how much has been spent on a particular department or inventory yearly, allowing for a faster month-end and year-end close. GL codes do not replace the longform descriptive names for accounts but enable faster data entry into the accounting system. 

How are GL Codes assigned?

Set up GL codes is done in a descending fashion, i.e., starting from the largest natural numbers. For example, a company may categorize its spending as 1000 for all inventory costs, 2000 for all shipping costs, etc. The account may then be further divided into specific subcategories of the spend such as 2100 for ground shipping, 2200 for airways shipping, etc. 

Establishing this organizational structure makes identifying GL codes easier. Placing the higher level category of a spend also lowers its options, making the GL coding process more efficient and faster.

Examples of GL Code assignment

Let’s assume that a car manufacturing company receives an invoice for its purchase of rubber. Out of the GL accounts coded as 0-1000 for people purchases, 1000-1900 for inventory, and 2000-2900 for office supplies, the accountant processing the invoice narrows down the entry to belong in the inventory range. 

The inventory is divided into car body parts from 2000 - 2100, motor parts from 2200 - 2300, and accessories from 2300 - 2400 and 2400 - 2500 for tire parts. This helps the accountant add rubber to its correct GL code - 2440 for rubber. 

Importance of correct GL Code assignment

The GL codes used to categorize a transaction, form the basis for a company’s financial statement - balance sheet, profile & loss, amongst others. Thus, every expense, income, receipt or payment needs to be meticulously coded to the correct GL account. However, with the large volume of numbers involved and GL coding being a manual practice, leads to multiple human errors. Incorrect GL coding must be addressed to ensure the highest level of accuracy in GL coding. Here are a few reasons why:

Better budgeting and forecasting

Correct GL coding helps you better budget for your future projects. Knowing how much money each department spends allows you to better plan your future expenses and allocate budgets for different categories. 

Improve compliance and leave audit trails

Correct GL codes for each transaction help identify where payment has gone and why it was processed. It allows you to identify spending and creates a paper trail for internal and external audits. GL coding also helps segregate your liabilities and expense accounts for your balance sheet, allowing you to report correct financial data and avoid legal issues. 

Improve cost control

GL coding can also help you control costs by allowing you to analyze how the monthly spending of a department stacks up against its annual budget. Doing this enables you to prevent future costs and avoid any monetary surprises. 

Avoid risks

Accounts payable risk assessment is a technique used to ensure that your accounting processes aren’t prone to any leakages in spend. GL coding tightens the security checks within the company by providing information related to each transaction and identifying the culprit behind overspending and invoice frauds. 

Visibility into spending trends

With a real-time analysis dashboard and accurately coded transactions, you can pinpoint where every penny is going and identify areas of overspending in a few clicks. 

When are GL Codes assigned

GL coding is done before every single transaction takes place. In the case of accounts payable, GL coding is done right after an invoice is received. The accountant assigns a GL code to the invoice based on the vendor or the line items. Multiple GL codes might be posted to an invoice in case of numerous split or multiple line items. 

Multiple GL coding is done in various ways depending on company preference. For example, an expense for desktops might be divided according to the number of employees using desktops in each department. Alternatively, a cost for multiple items from the same vendor might be divided according to line item value between various departments. 

Challenges with GL Code assignment

GL coding is a challenging process to follow, especially when done manually. Here are a few challenges associated with manual GL coding:

Remembering and maintaining spreadsheets

GL codes must be accurately updated and maintained in a spreadsheet, etc. This becomes extremely difficult with multiple people working and relying on a single document. Managing multiple access to the document also becomes an issue. Further, while addition of new GL codes is rare, accounting teams need to ensure that spreadsheets are updated in any such event.

Time-consuming

It is cumbersome and time-consuming to look up correct GL codes and assign them to invoices and line items. Your accountants might spend hours GL coding and processing invoices, leading to delays in payment transactions, which negatively impacts your company’s supply chain. 

Error-prone processes

Manual processes are also prone to human error. Incorrect GL coding can harm your company’s financial wellness and security. It would lead to improper budget allocation and non-budgeted and unaccounted expenses. Inaccurate financial records may also lead to compliance issues. 

Losing invoices

Processing invoices and GL coding is a task involving multiple people. Shuffling paper invoices around desks and tracking them is a challenging process. Many paper invoices get lost in the mix or their processing may be delayed because of such inefficient manual processes.. 

How automating GL Code assignment works

The best solution to solving the challenges mentioned above is automating GL coding. This is done by employing robotic process automation (RPA). RPA tools learn your GL coding practices as a base and automatically assign correct GL codes and cost centers to your invoices. For example, suppose line items containing chargers from a vendor are assigned to GL code 2100, and those having computers are given GL code 2400. When recurring invoices from the same vendor are received,, the tool automatically updates GL code 2100 for an invoice only containing chargers. 

End-to-end AP automation can also help you simplify the GL coding process since GL codes are directly applied after the OCR is completed. Some AP automation vendors, like ClearTech, guarantee nearly 100% accurate invoice digitization and automatically assign GL codes to your expenses, allowing you to send an invoice for approvals with a single click. 

Conclusion

GL coding involves assigning an alphanumeric value to different transactions, effectively categorizing them into different expense types. GL codes are highly organized systems, sorting each spend category and subcategories depending on the highest order value of the code. GL coding all transactions correctly allows for a smooth accounting close, compliant processes, a complete view of your spending, and protection against fraud. Many companies manually assign GL codes to invoices, which is a highly error-prone and time-consuming process. Implementing automation can reduce errors and save time on manual assignments, allowing accountants to focus on more critical tasks.