LET’S GET STARTED
- 1 What is the general ledger?
- 2 The different types of general ledger accounts
- 3 Why Your Business Needs a General Ledger
- 4 General Ledger vs. the General Journal
- 5 The general ledger and double-entry bookkeeping
- 6 Double-entry trial balances
- 7 The accounting equation
- 8 General ledger codes: What they are and how to use them
- 9 How you access the general ledger
- 10 A Simple Example of a General Ledger Entry
- 11 Leave the Accounting to Us
Terms such as accounts payable and accounts receivable are typically understood by most small business owners, but they might not have as solid a grasp over what a bookkeeping ledger is.
A general ledger is perhaps the most important accounting tool that a business owner will use to run the day-to-day operations of a company. It's the primary way a business keeps an eye on its record-keeping and business accounting.
Understanding exactly what a ledger represents, and all the transaction data that make up a ledger is crucial to the financial success of small businesses.
What is the general ledger?
The general ledger, also known as a general journal or accounting journal, is the cornerstone of accounting. Back in the good old days, it was a huge book that included journal entries for every financial transaction was recorded - by hand.
Today, accounting software has rendered the keeping of financial records by hand obsolete. However, the general ledger is still alive in spirit with modern bookkeeping systems.
Every time a financial transaction occurs - whether it's cash receipts or debits - it is recorded in the ledger in chronological order. These ledger entries include the date on which the transaction occurred, the category of the transaction, a description of the transaction, and the amount.
These ledger entries can then be summed into total credits and total debits for any accounting cycle you choose - a day, week, month, year, and so on. The data that's put into the general ledger is what will be used to create various financial reports such as a balance sheet, cash flow forecast, and the health of your cash account.
Simple general ledger examples can be created in a spreadsheet program such as Microsoft Excel, which will also provide you a choice of templates from which to start. Or, if you have a need to keep more in-depth accounting records, you can use an accounting system that allows you to access your data from anywhere, such as Quickbooks online.
The different types of general ledger accounts
While the general ledger gives you a great overview of every transaction your business has, it isn't always the best way to quickly glean insight into the financial information of your business. That's where subsidiary ledgers come into play as a useful part of the accounting equation.
Your business will typically have a few separate subsidiary ledgers that, when your bookkeeper compiles them together, will form your overall general ledger. The most common forms of subsidiary ledgers include:
- Cash Book: This includes the owner's equity (how much of the company you and other people own) as well as all other liquid assets your small business has. It's labeled an equity account.
- Inventory: This book will include any purchase or sale that affects your inventory. It's labeled an asset account.
- Accounts Receivable: This is the money that your business is owed by customers/clients. It is based on. your sales revenue, in part. It's labeled an asset account as well.
- Accounts Payable: This is the money that your business owes to vendors and creditors. It will include your debit balance and is one of your expense accounts.
Which subsidiary ledgers your small business has will depend on the type of business you run. If you sell a service, for example, you may not have inventory. There may be other types of subsidiary ledgers or other supplementary documents you will have, too, such as a chart of accounts that will list all of your accounts along with a description of each.
Why Your Business Needs a General Ledger
You may be questioning why you need a general ledger in the first place. Can’t you just handle the recording of your financial statements, income statement, cash flow statement, and others however you want and then compile them together?
You could do this, of course, but there are a few very important reasons why this wouldn't work.
First, the only way you'll be able to draw up detailed financial statements is if you have a general ledger. Without it, you'll only be able to get a very small picture of your company's financial performance. If you’re only looking at a small part of the puzzle, it'll be very challenging to make informed decisions.
Second, your accountant will need your general ledger in order to file your taxes. Preparing year-end taxes can be very challenging for businesses, and even more difficult if you don't have a general ledger to which you can refer. For example, if you're filing 1099 forms for contractors you hired, you'll need to check the invoices you sent against your general ledger to ensure everything is being prepared properly. Without that general ledger, it will be next to impossible to do this.
Finally, the general ledger gives you one centralized place where you can see (and sort) all of your data. You may only need to see this data in its entirety rarely, but it'll be essential to have it when you do need it.
General Ledger vs. the General Journal
It's easy to confuse a general ledger with a general journal, but it's very important to understand the differences between the two. The general journal is the chronological list of every transaction recorded. There will be many general journals that you have for your business.
By contrast, the general ledger is an overview bookkeeping ledger that will be arranged by accounts. The general ledger is where you will go if you want to see your updated balance after each transaction. The general journal will not show that, since it is an incomplete picture of every financial transaction.
A business will use a general journal instead to record data for their financial transactions. Once that transaction happens, a source document is also generated, which then allows the financial transaction to be entered into the business' general journal.
The general ledger and double-entry bookkeeping
Most small businesses will use what's known as the accrual accounting or double-entry bookkeeping system. In this type of bookkeeping ledger, each transaction that occurs will be recorded two times. One will be recorded as money taken out of your account (as a credit), and one will be recorded as money entering your account (as a debit).
This way of approaching a general ledger is how a business balances the books. In order to have a healthy balance, all of your debits must equal all of your credits. If they don't, then something is off. This is the main feature of the double-entry bookkeeping system and why it's the one most commonly used by small businesses. The built-in system of cross-checking errors is what proves so valuable to business owners.
Only very small businesses would be advised to use a single-entry bookkeeping system, in which each transaction is either listed as a credit or a debit - not both.
Double-entry trial balances
Trial balances are an important part of the double-entry bookkeeping system. Before you prepare your final financial statements to be distributed and reviewed, you can prepare a trial balance from your general ledger to make sure everything balances out perfectly.
You will run a trial balance that adds up all your credits and debits during whatever accounting period you choose. Then, you'll have the chance to take this information to make sure the two equal out. If they don't, then you can do a closer analysis of the bookkeeping ledger to see where the problem may lie before preparing the financial reports.
The accounting equation
There is one general equation that is used in accounting to describe what a general ledger should look like. It is displayed like a mathematics equation as:
Assets = Liabilities + Equity
Accountants can use this equation to determine whether your bookkeeping ledger is balanced or not. If your total liabilities plus your total equity don't equal the total assets that you have recorded, then you need to fix something.
This accounting equation applies no matter which accounting method you choose to use for your small business.
General ledger codes: What they are and how to use them
It can be easy to get confused with a bookkeeping ledger if your small business has quite a few transactions. One huge list of financial transactions can certainly be confusing, as you might imagine.
One way that you can make things a little easier is by organizing your general ledger with general ledger codes. The way this works is you create categories for all of your equity and liabilities, then assign a numeric code to every transaction that fits under each category. This allows you to easily sort all of your transactions by category.
What general ledger codes you create, and what categories you create and assign them to, are completely up to you. The important thing is making sure that you stay consistent in assigning your general ledger codes to transaction categories and recording them along with every transaction.
Some small businesses will categorize all of their equity categories in the 100s, with all their liability categories in the 200s.
Here is an example of what general ledger codes might look like:
|Date||General Ledger Code||Category Description||Transaction Detail||Amount|
|January 3, 2020||102||Equity||Month's starting balance||$1,567.87|
|January 5, 2020||201||Internet service||Monthly expense||($125.76)|
|January 7, 2020||103||Sales revenue||Expo sales||$1,784.54|
|January 10, 2020||205||Office supplies||Paper, toner, staples||($104.56)|
How you access the general ledger
How and where you will access your business' general ledger will depend on how you choose to go about this accounting task. If you are doing this on your own using Microsoft Excel, then you will go to the document you create where you record all of your small business transactions.
If, however, you have hired the help of a professional bookkeeper, you will most likely use accounting software to access your bookkeeping ledger. Keep in mind that a general ledger is not a report that you will use, per se. Instead, it is a report that you will pull to see all of your business' financial transactions in one place.
No matter what particular accounting software you use, it should have an easy way for you to view your general ledger. Because it is such a widely-used and accepted report, it should be easily accessible in the accounting software.
The good news, though, is that if you choose to work with a professional accounting firm such as Punch Financial, you won't ever have to worry about your general ledger. Our accounting professionals will do all the work for you. Then, your on-staff bookkeepers can simply pull the general ledger at any time and ask questions if they have any.
We set up your financial data all in one place and manage it on a consistent basis. Then, whatever financial reports you need, you (or your other staffers) can pull those reports -- all of which will come from the data that's in your general ledger.
A Simple Example of a General Ledger Entry
Let's take a look at a very simple example of how you would use your general ledger with a single financial transaction. First, we need to create a hypothetical financial transaction that we can record in your bookkeeping ledger.
Let's just say your company needs to buy some computers and software that your in-house sales team will use to manage their pipeline. First, start by recording the date of the transaction on the far left column title "Date" (as can be seen in the table above).
Then, simply work from left to right, filling in the columns with the appropriate information. Assign this expense to the proper category with the General Ledger Code that goes with it. Then, enter your category description as well as a detail of the transaction, such as "computers and sales software."
Finally, enter the amount of the transaction in the final column to the right. Since this is a debit, it should be displayed in parenthesis to signify that it's a debit from your account. And that's it!
Leave the Accounting to Us
Now that you understand what a general ledger is and how it works, it's time to get started for yourself. If your small business is bigger than a single-person operation, though, you may not want to go this alone.
That's where Punch Financial can come in to save the day. We know that as a small business owner, you have a lot on your plate already. You don't need the added burden of juggling financial data. At the same time, we recognize how important keeping solid bookkeeping records is essential for your long-term success.
We can handle all of this for you. Our team of dedicated and experienced accounts treats you more like a business partner and less like a customer. We take the guesswork out of accounting so that you can focus on what you do best - running your business.
Let’s connect to give you a customized quote and free consultation. You have nothing to lose but so much to gain.