Ledgering, All the Way Up

So: you need a ledger. But the word “ledger” encompasses several different, overlapping contexts. It’s important to choose the right kind of ledger for your specific needs, and to understand how the different kinds of ledgers overlap.

Ledgers, broadly speaking, are meant to track the movement and disposition of a fungible item, usually (but not always) money. But different ledgers serve different purposes: General ledgers are for financial reporting to external entities, such as the tax office. Core ledgers provide a system of record to track the internal movement of funds or other fungible items like credits. Let’s look at each of these more closely, then we’ll also look at two other related, but less common kinds of ledgers: Cash ledgers and Sub-ledgers.

General Ledgers

Just about every business requires a general ledger. General ledgers exist at the company level, and are used in account and financial reporting. These are typically based on an account standard like GAAP (in the U.S.) and IFRS (in much of the rest of the world). The role of such a ledger is to provide an auditable account of the movement of actual credits and debits into and out of the company, and uses highly opinionated rules that dictate the meaning of each entry, such as deprecation and recognizing revenue.

Typically, general ledgers are produced by your accountants, or by business operations software like Quickbooks or NetSuite. Such ledgers can be audited by external accountants (for example, one of the Big Four: Deloitte, EY, KPMG, or PwC) for (e.g.) legal compliance purposes or operations streamlining.

General ledgers are the source of data for compiling balance sheets, profit and loss statements, and other financial reports of interest to government agencies and investors.

Core Ledgers

Where general ledgers are focused on external reporting and are required for nearly every business, core ledgers are focused on internal operations and have a more niche use-case. Their purpose is to provide a real-time accounting of virtual funds, typically as part of a tech product that allows your users to engage in economic transactions. Frequently, no actual money is being moved around—it might all just be sitting in your bank account—but credits and debits are issued between users as they transact.

A common example of this kind of product is a marketplace, where you host buyers and sellers who transact through your platform. The transactions of the buyers and sellers occur independently of the actual movement of money through your bank. For example, you might only offer monthly payouts to sellers (a single movement of real money), but those payouts may represent thousands of sales.

Another example is a neobank, where your financial services are often layered atop a traditional bank. So, when a customer swipes their card, your core ledger can tell you whether to authorize the transaction based on available funds, debit the customer’s account, divert any fees where they need to go, and credit the vendor—without the need to move actual money through your traditional banking accounts.

A core ledger is your system-of-record for these kinds of virtual movements, independent of the financial reporting that goes into a general ledger. Core ledgers are not meant to answer sophisticated financial questions and are not opinionated on the meanings of its entries. Instead, they are designed to answer relatively small questions but in large volume: Are there enough funds in this account to initiate the desired transaction? And then did the correct amount of money flow through the transaction and end up in the correct places in the correct amounts?

Because they typically handle large volumes of transactions in a product, core ledgers are implemented in software, and integrated directly into your product backend. And this is precisely the functionality that Formance Ledger offers.

The data contained in a core ledger does however feed into the general ledger because ultimately the movements in the core ledger will resolve into movements of real money through your bank accounts.

Other Kinds of Ledgers

Although general and core ledgers are the most important kinds of ledgers, there are of course a few more types worth mentioning.

Cash Ledgers

Cash ledgers are something in between a general ledger and a core ledger. Like a general ledger, it is meant to track actual money movements. But unlike a general ledger (and like a core ledger), it doesn’t assign meaning to those transactions. A cash ledger contains the same data as a bank statement, albeit in a different format. Formance Connectivity exposes a clean cash ledger structure.

Sub-ledgers

“Sub-ledgers” is a term you may have encountered, but the meaning is ambiguous and could refer to one of several other kinds of ledgers. Sometimes the term is used to refer to a core ledger. Other times it might denote sub-pages of a general ledger. The term also sometimes describes a less formal account model that records basic business activity like invoices and purchases, with the intent of mapping this data into the general ledger.

What Kind of Ledger Do You Need?

Nearly every business requires a general ledger—this is of course the core service that an accountant or business operations software provides. But, because of its role as a source of truth for auditing and establishing the solvency of your business, a general ledger is not suitable for recording transactions that your business might facilitate.

Thus, if your business facilitates transactions, because it is a marketplace, a neobank, an investment platform, or even a game with an in-game currency, you need a core ledger to validate and record the flows of these virtual transactions. On the other hand, if you are not in the business of facilitating transactions, you likely do not need a core ledger.

Learn more how Formance Ledger can help you efficiently and track in-product transactions directly in your product.