From a family law standpoint, the general ledgers of a business are one of the more critical pieces of disclosure that are typically required for the preparation of business valuation and income for support reports.
What is a general ledger?
General ledgers represent the detailed summary of all transactions that are recorded within a business’ accounting records and therefore support all of the aggregated balances reported on their financial statements. It is this level of detail that makes them an important piece in understanding the accounting for a business.
Why are general ledgers so important?
There are certain family law situations where the general ledgers might not be required for a business valuation. However, when you are dealing with small to medium sized owner-managed businesses it is generally necessary to review the general ledgers.
Reasons for this include:
- Depending on the valuation date, you may need to understand specific account balances at a particular date that may or may not coincide with the year-end or month-end financial statements prepared by the business.
- Having a detailed summary of all the business’ transactions allows for identification of any unusual or extraordinary transactions that may require further investigation, or understanding, and will ultimately assist in determining the appropriate treatment of these amounts in either the business valuation and/or income analysis.
- Most importantly, the general ledgers assist in the identification of potential personal expenses that are being charged through the business which may represent normalization adjustments from a business valuation standpoint or additional income streams when determining income available for support.
When are general ledgers not helpful or sufficient?
There are definite situations where a “general ledger” of a business is not sufficient and thus may require even further detail to address the issues noted above.
These situations include:
- In some instances, the transaction description that gets used in recording the transaction does not provide enough detail to allow for an understanding of the nature of the transaction which thus limits the usefulness of the general ledger. This may have been done on purpose or we have been aware of situations where transaction descriptions have been altered to try and hide certain transactions.
- In other circumstances, the transactions get posted as a batch entry and therefore include several transactions combined into one single entry in the general ledger. This can happen with certain accounting software packages or where the bookkeeper posts several transactions from a credit card statement as one single entry. In these situations, it is necessary to request further accounting records or supporting documentation (i.e. credit card statements in the latter example) to understand the detail behind the transactions.
As noted previously in our article related to obtaining disclosure in a family law, obtaining adequate disclosure in a family law matter has become increasingly difficult and, in our experience, the general ledger component can be one of the more contentious and difficult pieces to obtain. However, the general ledger is critical and something that the courts tend to require business owners to provide when they need to have a business valuation or income for support report completed.
Author: Trevor Hood, Partner, Valuations
