Keeping careful track of all of the financial transactions associated with your business is vital for a healthy organization. As a business owner, though, you may find yourself overwhelmed by the sheer number of accounts, credits, debits, income, and more that you hear about all day long.
A general ledger is the place to start organizing all of that information so that you can keep your financial health in check. It is typically kept by either an owner or accountant and while it used to be done by hand, most businesses now use accounting software to simplify the process.
What is a General Ledger?
A general ledger is a comprehensive history of all the financial transactions relating to your business for a particular reporting period. It is where all of the information from all sub-ledger or subsidiary ledger accounts can be found; an index that you can refer to in order to make sure your accounts are correctly balanced.
Any money that goes in or out, in any form, will be recorded here. That includes assets, equity, revenue, and costs. For example, you may have one sub-ledger for your assets, one for your sales, and one for your expense accounts. If that’s the case then at the end of each day, week, or month, you would record all of those transactions again in your general ledger, where they could all be found later.
A general ledger is usually kept for the entirety of a reporting period, which may be a month, a quarter, or a year. It may be kept by hand, but it is almost always done with the help of an accounting software these days.
What Does a General Ledger Look Like?
When creating a general ledger, you will place each account type in different sections. Those might include:
- Assets: This includes cash, money owed to you in the form of accounts receivable and notes receivable, your inventory, and your fixed assets.
- Liabilities: This refers to money you owe, such as accounts payable and notes payable, and accrued expenses.
- Equity: This might be owners’ capital, stocks, paid-in capital, dividends, treasury stock, retained earnings, or distributions.
- Operating revenues: This refers to money coming in through sales and service fees.
- Operating expenses: Operating expenses denote money going out during and because of operations. It includes wages, salaries, rent, depreciation, and utilities.
- Any other income: Think of this as your miscellaneous category, where other transactions or changes will be placed. Things like income from investments, cost of interest, and any gains or losses in asset disposal.
Why Do You Need a General Ledger?
Whether or not you need a general ledger will depend on your unique needs and accounting system. Most advisors will recommend that you keep one, even if you are a small business owner doing your own bookkeeping.
The benefits of keeping a general ledger far outweigh the hassle, and include:
- To provide and inform financial statements: Keeping a detailed record like a general ledger makes it much easier to generate financial statements and documents that can give owners and stakeholders a better idea of their financial position.
- To fill out other financial reports: Other reports, like your balance sheet (more on that later), can be filled out much more easily by referencing a general ledger.
- To simplify taxes: Having all of your documents and records in one place can take some of the headache out of filing taxes.
- To track cash flow: It is much easier to get an idea of trends, strengths, and weaknesses when tracking them in a general ledger account.
- To detect mistakes and fraud: Similarly, it’s more likely that inconsistencies, whether accidental or malicious, will be identified quickly if they are regularly recorded and checked in a general ledger.
- To compile a trial balance: A trial balance is an important part of your accounting records. It involves using your records to total your credits and debits to be sure the current balance is correct and to identify any accounting errors. You can refer to your general ledger account balances periodically to create this trial balance.
- To keep track of expenses: Documenting all of your company’s transactions, including every expense, in a general ledger can make you more aware of your spending.
How Do You Keep a General Ledger?
You, your accountant, or your bookkeeper can keep a general ledger by hand, but most people use software like NetSuite or OASIS.
Still, to enter information into these systems and understand the report, it’s helpful to know how to keep a general ledger account.
In the past, when most ledgers were maintained by hand, accountants would record daily transactions in a journal. Those journal entries would then be transferred to the general ledger, which would serve as the master document. You may still hear the phrase “journal entries” bandied about, but typically, thanks to the modern-day advances in technology and software, entries are made directly to the general ledger accounts each day.
When recording an entry, you will need to include enough information to make it easy to understand the transaction when you are reviewing the books in the future. That means your transaction data should include:
- An indication of the item number of the transaction
- A brief description of the transaction
- An indication of the amount received or paid out
- The resulting total balance after the credit or debit
Creating a trial balance report
The most common use for a general ledger, other than reviewing and helping create financial statements, is in creating trial balance reports.
At the end of a reporting period, your company’s financial data can be reviewed in this report to ensure that there are no errors in the accounts or journal entries.
To create the trial balance report, the debits and credits are added up for each account. Then, the credits are separated from the debits and totaled. As long as the debits and credits are equal, it’s likely that your general ledger and its transaction details are correct.
Double entry accounting method
In order to get an accurate trial balance, and to keep your general ledger accounts accurate, you will have to get acquainted with the double entry system.
The double entry accounting method simply means that when recording your transaction data, every entry must have an opposite but equal entry listed in its corresponding category.
For instance, if you pay out $500 for an expense, you would list that in your general ledger under your expense account as a debit of $500. Then, you would need to list it again as a corresponding credit. In this case, you would list a credit of $500 under your cash account. When you add these entries together, they must equal zero.
In other words, you’re constantly double-checking your own work with double entry bookkeeping. Every time you record one transaction, you offset it in another, so that by the end you should have equal sums for both credits and debits.
With the double-entry accounting method, accountability and precision are more likely – and your overall financial health is bound to flourish.
What is the Difference Between a Trial Balance Sheet and a General Ledger?
Both a trial balance sheet and a general ledger help you monitor everything coming in and out. However, they both serve different functions.
The general ledger contains detailed transactions, including the exact amount, day, and description of the event.
A trial balance sheet, on the other hand, is a bit simpler. It should contain just the final balance of the credits and debits, and leave out all the details. Typically, it’s much shorter than the general ledger.
Schedule a Business Accounting Consultation
Questions like ‘What is a general ledger?” can have complicated answers that come with their own vocabulary and history lessons. So if you aren’t well-versed in the world of general ledgers, double-entry accounting, and all of the nuances they come with, you can always turn to our team of CPAs at Steward Ingram & Cooper to lend a hand.
Our experienced team provides tax consultation and tax preparation services in and around the Raleigh area that include advice on double-entry bookkeeping to simply your credit accounts, we are here to support you through every aspect of the process. We serve Raleigh, Durham, Wake Forest, Wilson, Garner, Cary, and surrounding communities. Schedule a consultation today by calling us at (919) 872-0866 or filling out the form below to get started.
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