An Introduction to Accounting in Banking

As a topic, accounting is probably not the most glamourous subject that you can imagine. However in my 30 years of carreer in IT mainly dedicated to installing Accounting systems, all projects have been made of surprises and new lessons learnt. As I spent more than half of my professional life on SAP products, I hope to be able to thank all the professionals who have helped me by in turn helping my young collegues in sharing my knowledge.

Among the industries, Banking is probably the one that makes the most use of IT and of course Accounting is the place where every event in the Bank ends and where all the information users look for reliable information.

one could say that a general ledger is a general ledger , a 2 files systems , one for the debits and credits ( line items also called journal ) and one for the totals ( balances also called General Ledger ) per year, month day … so why it should be different from any industries ? this has been the case since the 12th century when one of my Italian ancestor willing to track money transfers from Italy to the Nederland for trading spices against wool started to use what Accountant have been using since : double sided accounting , all movements are reflected by a debit and a credit summing to zero to make sure that nothing is lost ! it was already a banking business that was the first user of this new accounting.

What has changed today ? only one thing : the volume , when one merchandise movement from Venice to Antwerpen was taking half a month, millions are happening daily worldwide , requesting more and more corresponding money movements and more accounting debits and credits. In that respect, Banking is a unique industry because it is financing all the other industries. So the movements in banks only reflects the business of the world being individuals or companies.

In the beginning General Ledger was doing everything receivables, payables, treasury resulting in extremely rich ( another word for complex ) information being stored in the account number to help the acocunt to track the movements. Gradually specialized ledgers ( Receivables , Payables , Assets ) were created to store the detail information dedicated to these types of transactions and reducing the complexity of the G/L.
This possibility has been extended by SAP to banking operations in a so called Accounting for Financial Instruments subledger giving the way for banks to really achieve the thin General ledger versus fat subledgers. So instead of storing in the general ledger information like the customer type, the product type , the Line of business etc… necessitating complex postings ( always minimum the debit and the credit ! ), they can simplify the general ledger balances to a thing G/L with the account number, the profit center the segment of the business , the rest of information being stored at the contract level in the Bank transactions subledger with all the possible details.

The conclusion of this first post to the never ending question : how thin is a thin general ledger in a nutshell you can answer :
– legal entity, profit center, segment , currency , account number ( the natural account ) , and of course to prepare hte consolidation being management or legal the partner entities involved in the posting ( partner legal entity, partner profit center , partner segment )

Article written by Eric Berettoni

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