Accounting Basics: The General Ledger

One of the most important components of accounting and bookkeeping for small businesses is the general ledger. Even if you aren’t handling the day-to-day responsibilities of your business, it’s important that you know what the general ledger is and how it works. This is the basis of good bookkeeping practices, helping you manage the financial picture for your company.

Types of Ledges in Bookkeeping and Accounting

A ledger is a book where a summary of all ledger accounts is maintained. Before the computer age, ledgers were literal books where business owners had hand-written entries of their transactions. Now, the digital business world mainly uses databases where the transactions are tracked and stored. It’s important for each business to have a place where they can group individual accounts. In addition to tracking the transaction amount, the ledgers also contain other important information such as how the payment is received, the date of the transaction, and anything else that applies to the purchase.

In bookkeeping and accounting, there are three types of ledgers used:

  1. Sales Ledger: This ledger is also sometimes known as a “debtor’s ledger” or “accounts receivable.” This is the place where all transactions are grouped where the customers received services or goods on credit. The sales ledger shows the total of all money owed by the customers to the business.
  2. Purchase Ledger: Next, you need a place to group the accounts related to sellers that you’ve purchased goods or services from using credit. This ledger summarizes the total money owed by your business to other businesses or sellers – also known as “accounts payable.”
  3. General Ledger: Finally, the general ledger is a single place that centralizes all the ledger accounts in a business. The general ledger includes both the sales ledger and the purchase ledger, as well as any other applicable subledgers, such as a private ledger or nominal ledger. All types of accounts within a business are included on the general ledger, including liabilities, assets, revenues, expenses, equity, and capital.

Having separate ledgers helps to reduce complicated aspects within bookkeeping and accounting. At the same time, it’s essential to have a centralized location where you can access all applicable information.

General Ledger History

The use of a general ledger has been around for a long time. Luca Pacioli was a Franciscan monk who is known as the father of accounting – he created the first known accounting text. Even though Pacioli has received much of the credit in the history of accounting, his practices were actually based on existing practices that trace back to Benedikt Kotruljevic.

In the 1400’s, Kotruljevic started using a double-entry accounting system. This method of double-entry uses multiple accounts with two columns: debit and credit. As a result, it’s possible to see an accurate view at all times, showing how each transaction affects the various accounts.

What You Need to Know about the General Ledger

If you want to know all the financial information about your business, then the general ledger is the place to look. It is the foundation or backbone of every reporting system. Any time you have a business account and subledgers, these transactions are reflected in the general ledger.

The data for each account is recorded when the transaction occurs, with points listed in chronological order. Not only is the data posted to the individual accounts, but it is also reflected in the general ledger. As a result, the general ledger always shows the history and most recent financial data for the business.

Information You Get from the General Ledger

What can you learn by looking at the general ledger? These transaction details can be valuable for a business owner to understand. Everything is summarized and compiled in one location, helping you access a variety of financial reports and other things that are applicable to your business.

Not only can you use this information as a business owner, but this information is also essential for business management, accounting, investors, analysts, and other stakeholders. Anyone who needs to see the company’s performance will be looking at information that comes from the general ledger.

One example of how the general ledger is used is if you see that costs and expenses are increasing during a certain time of the year. You can look at specific financial reports, as well as other information from the general ledger to see the whole story.

Additionally, it’s essential to identify certain accounting errors that can be located through the general ledger. Each transaction can be reviewed to find the source of the problem. Then, transactions can be updated and you can implement new systems to avoid the same errors again in the future.

 Benefits of a General Ledger

Even if you aren’t trained in bookkeeping and accounting, a general ledger system is always used in your software program. You don’t have to be aware of the general ledger to be gaining benefits from this part of your financial system.

Here are a few benefits that your general ledger adds to your business financial tracking:

  • Accurate Tracking: When you are looking at financial reports, you need to have the confidence in knowing that the reporting is accurate. The general ledger makes it easier to ensure accuracy in your reporting. Everything is entered in sub accounts first, making it simple for the accounting system to pull the balances across for reports that you might need. For example, if you run a profit and loss report, then this income statement pulls information from the general ledger. Maintaining a consistent bookkeeping system is essential to give you correct financial information at all times. Then, you can use these reports when you are making important financial decisions for your business.
  • Budgeting: Setting a budget is a step that helps you manage spending and look at future costs. Too often, businesses lean on incorrect information or fail to set a budget at all, resulting in unexpected expenses that can cut into profit margins. A general ledger is a great tool to identify trends and see where budgetary adjustments need to be made, helping to strengthen the financial health of the company.
  • Auditing: Whether you are conducting an internal audit, or you are going through an external audit, the general ledger is the focus of this inspection. Since the general ledger shows all business accounts, the auditor needs to be sure that everything is recorded and accurately classified. Reviewing general ledger information in an audit is an important step for identifying potential errors and improving the overall system.
  • Analysis: Can you find areas of opportunity to improve your spending and business activities? If you want to analyze trends and look for points that can be improved, then it all comes down to what is happening on the general ledger. In-depth financial analysis usually focuses on specific subledgers. But you can see the overall picture by looking at the trends that are happening on the general ledger.

Set Yourself Up for Business Success

Your accounting and bookkeeping system makes a significant difference in the success of your business in the future. If you are good at selling products, but you neglect your financial reports, then you are building the company on a weak foundation. It’s essential that you always have accurate financial information at all times, giving you a way to move forward in a productive, effective manner.

Even if the reports aren’t showing the profit margins that you want, this financial information is critical so you can implement the right systems to support your business. Looking at financial data regularly is key to empowering you in making correct decisions that lead your company to success in the future. When you know the numbers are accurate at any given time, then you can make decisions with confidence that you are choosing the right solutions for your business.

The only way to ensure that your general ledger is correct is by proactively updating your records regularly. It takes time and effort to stay consistent with the bookkeeping, but it’s an important process to keep you ahead of the ongoing transactions that move through your business.

Professional Accounting Services for Small Businesses

Often, the biggest barrier to an effective bookkeeping and accounting system is staying consistent with the ongoing tasks that need to be addressed. Not only do you need to stay current with the transactions, but you need to have a good system of checks and balances to identify potential errors or issues in the earliest stages.

As a business owner, you are juggling a lot of responsibilities throughout the day. You don’t have the time or expertise to dedicate your hours to bookkeeping and accounting. Instead, let the pros take care of your books so you can focus on other responsibilities in your business.

If you are looking for a pro accounting team that can help with your general ledger and more, then call us at Easier Accounting. We’d love to talk to you about the ways your business will benefit from the services we offer. Contact us to learn more about the individual services you can choose: (888) 620-0770.

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