The Basics of GL Coding

First of All - What is a GL Code?

A General Ledger Code (GL Code) is a string of alphanumeric characters assigned to each financial entry in an organization’s ledger. A GL Code can indicate basic information such as a debit or credit by location or provide highly specific details about an entry through a GL String. A GL String is made up of a combination of numbers and groups of numbers that when applied uniformly can categorize every point of information for an entry.

There are virtually no limits to how detailed a GL string can be – it is up to your organization to decide the best practices for GL Coding. Below are some common GL Coding practices and tips to keep your Accounts Payables and Receivables from losing their minds in the complexities of accounting.

GL Coding Helps Big Data

One of the great benefits to using a uniform GL Coding system is the extremely quick data analysis and reporting. If you need to know exactly how much was spent on raw materials at a specific location over the course of 14 months, you merely have to search for the corresponding GL Code and every transaction meeting those parameters is instantly visible.

If you need to compare one of your locations to another location – simply pull up the GL Codes for each location and compare the data. Use of big data applications has increased 17% since 2015, (Forbes); the easier it is to sort, analyze, and display data, the better positioned your company is to make informed decisions.

One Code Fits All

From the beginning, it is imperative to leave room for your GL Coding system to grow or shrink to meet future needs. If you are implementing a GL Coding system for the first time, the best first step is to outline the current Accounts Payable and Receivable process.

Start with a complete understanding of what you are currently doing, what you need to do, how the process will change, and who is responsible. Once all of that is known, the plan to implement the GL Coding process can be created.

What points of information do you capture now, and which points of information do you ignore? Can you foresee any scenario in the future where you need to capture more or less information for the General Ledger? This is the most important step in creating the GL Code string your organization will use. This will make perfect sense later when we breakdown a real GL code to give an accurate example. Common points of information organizations choose to capture include, but are not limited to:

1. Item
2. Customer
3. Vendor
4. Manufacturer Location
5. Project
6. Method of Shipment

Below is an example breakdown of a GL Code String used by a lawnmower manufacturer:

In the above example, you can see the GL Code strings are the exact same length but give very different information. Before the first code is ever applied, the cadence has to be decided. Each section must always portray the same kind of information. If the item is indicated by the first section, it must always be indicated by the first section. If “2” is used to mean Home Depot, as the first number of the third section – it must always be used to mean Home Depot when placed in the same spot. 

Adding New Information to a GL Code String

It is important to have one or more (depending on size) specialists who oversee all GL Coding options as everyone in the organization has to use a standardized GL Code for the data to be accurate. Let’s look at a few scenarios that will require changes to the GL Coding String.

Scenario 1

You have undergone the exhausting task of deciding what information your GL Code String will capture, the format, and how all of your existing information will be coded. You begin applying your code to all transactions and everything is working wonderfully. Your data is eye-opening, your finances have never looked more organized.

However, four months after your system was put in place, your organization is shutting down a distribution center in Oklahoma and opening a new one in Missouri. This change is as simple as just creating a new identifier (defined numeric code) for the Missouri DC and putting it in use when the switch is made.

It truly is that simple to implement new GL Codes into your company's database.

Scenario 2

The CFO loves the new GL Code String and wants to push it further. She can prepare certain reports faster if she has quicker access to data that isn’t captured by the current GL Code string. Your GL Code has always followed the same format, for example, (xxx-xxxx-xxx). It is easy to add an additional section to indicate more information.

You may have to make system specific tweaks, but changing an existing format from (3 numbers – 4 numbers – 3 numbers) to add one more section of numbers on the end is as simple as just doing it. Again, you’ll have to review all of the current possible options for that data and apply a standard code. That is the most time consuming part but the ultimate convenience of the GL Code will far outweigh the initial inconvenience.

What about the transactions before this new section was required? If your system requires you to have every single code the same length – the most common solution is retroactively adding -0000 to all of the codes that existed before this change. That way the code meets the format requirements, but the entry of 0000 doesn’t actually indicate any information. The use of 0 in a GL Code should always indicate no information unless being used as a place holder, such as: 001, 002, 003, etc.

Automating the GL Code

Everyone knows a person in the office who takes their 10-key skills seriously. Accounts payable and receivable folks can make music with their 10-keys, they are so practiced. However, when facing a GL Code of 8, 12, 16, or even 32 characters, there are only so many transactions they can code in an hour.

With all the responsibilities your accountants have to begin with it is impossible to find the time to GL Code every invoice. What is next then, hiring staff just to GL Code all day? GL Coding was supposed to save your organization time and money on the reporting side and now that is being edged out by needing additional human capital.

The answer: automate the GL Coding by automating your invoice processing. There are a multitude of software solutions out there that specialize in invoice processing. They are mostly affordable, high-quality, and easy to use. Many work by allowing you to scan invoices in and they pick up information points. Others require entry of certain information points and then it automates many tasks after in your system based on the data entered.

More sophisticated solutions setup EDI (Electronic Data Interchange) or API (Application Program Interface) connections between your system and your vendors allowing invoices to be automatically entered electronically through a secured feed. Holistic solutions include all of the above and may even use outsourced human capital to assist your organization. There are many companies who employ great software and people to manage your entire invoice processing needs with you.

GL Code Specialization & Conclusion

Like anything, GL Codes and invoice processing as a whole, can be 100% specialized to fit your needs. The era of technology is upon us and testing unlimited possibilities happens at companies every day. The information above is intended to only provide a beginner’s view of how GL Coding works and how it is applicable across all organizations. If you are searching for a GL Coding Solution or an Invoice Processing Solution it is best to start with offerings that are specific to your industry or your needs.

Accounting needs are the 5^th most outsourced business function according to a joint poll from the websites Entrepreneur and Investopedia. There is nothing wrong with focusing on the mission that is the core of your business and outsourcing some services to specialty firms.

Last Updated: 3/27/19