Breaking Down the General Ledger
Accounting has evolved from hand-written journals to computerized databases, but many of the concepts are unchanged. Accountants and bookkeepers use the general ledger to capture all financial transactions related to a business as they occur. Here's a guide to the inner workings of today's general ledgers.
What Is a General Ledger?
At the most basic level, a general ledger is a listing of individual transactions grouped by account. For accounting purposes, each separate account reflects changes to a dollar balance over a period of time. The five main accounts used to categorize business activity are assets, liabilities, equity, income, and expense. Every financial transaction feeding up to a company's financial statements must be sorted into one of these accounts.
Grouping Frequent Transactions
If a company records frequent transactions to one account, like customer sales in a coffee shop, then a subledger may be used to accumulate information. At the end of each month or reporting period, the subledger's total will be included in the general ledger. When using the double entry method of accounting, each journal entry hits two accounts — a debit and a corresponding credit. For example, if cash is collected from customers each time a cappuccino is purchased, then the cash account would be debited, or increased with each sale. The balance of the entry would be a credit, or increase to revenue.
Updating Financial Records
To maintain up-to-date financial records, data must be collected as transactions occur. Rather than manually writing each entry, accounting software programs work more efficiently. Cloud accounting software will permit users unfamiliar with accounting to enter sales or expense transactions, which will automatically post to the company's general ledger. Business credit card information can also be downloaded and sorted directly into the appropriate expense accounts.
Financial statements are generated using account totals from the general ledger. A bookkeeper or accounting professional usually oversees the preparation of a company's financial reports. The accuracy of financial statements should be tested periodically to ensure that entries are posting to the correct accounts. External data, such as bank statements, can also provide verification of cash balances.
Structure and Consistency
Although it may take some time to set up a general ledger, using a structured accounting format provides several important recordkeeping advantages:
- Tracking financial data in one central system promotes consistency of financial reporting. For example, when employees maintain their own expense records, they may label items differently. But if everyone uses the same system for reporting purposes, data will be properly categorized.
- An automated general ledger, combined with double-entry accounting, helps bookkeepers to spot unbalanced entries and mathematical errors.
- By implementing a general ledger system, accounts can be updated as transactions occur, rather than postponing data input and reconciliation until year-end and overloading your accountant.
If your small business isn’t already using a general ledger to record financial transactions, it’s a good idea to start before the year gets too far underway. Modern online accounting programs make creating and maintaining a general ledger easier than ever for small businesses, so why not get started today?