A Small Business Guide To General Ledgers

The general Ledger is nothing new to the accounting world. It was invented hundreds of years ago, along with the double-entry bookkeeping system. However, if you’re a new business owner and have trouble understanding it, this article is for you! 

Read on to know what a general ledger is, why it is important and whether your business needs one. 

What is a general ledger?

To better understand general ledgers, let’s first go through a brief explanation of the bookkeeping process. We’ll start with journals. A journal is known as a book of original entries. That’s where you record every business transaction when it first happens, sothe records are always chronological. Once this is done, transactions in the journal are grouped by accounts (e.g., cash account, sales account, etc.). The categorized data are then posted to the general ledger, also named the book of final entries. The general ledger contains a separate form for each account, which is why ledger entries appear in the order of accounts instead of in chronological order as they are in the journal. 

Think of a general ledger (GL), or a nominal ledger, as a collector. It collects all financial data from journals, then summarizes and categorizes them systematically.  

An example of the general ledger

Below is a simple example to show you how bookkeepers record data; first in a journal, then in a general ledger. 

Example: A company sold goods to customers for$55,000, paid in cash, on July 16, 2019.

First, the transaction is recorded in the journal with a double-entry system and relevant details such as the date. The data is then posted to the Cash account and Sale account in General Ledger. 

general ledger example
Source: WallStreet Mojo

Categories of general ledger accounts 

The general ledger typically includes a list on the front page called the chart of accounts, which names all the accounts documented within. An account ledger refers to the documentation of a single account. 

Generally, most companies use the following five categories to group hundreds of accounts to organize their records: assets, liabilities, equity, revenues, and expenses. 

  1. Assets: Assets are any resources owned by the business and provide economic benefits. Assets can be tangible like cash, inventory, property, equipment, or intangible like trademarks and patents.
  1. Liabilities: Liabilities are debts owed by the company. There are two types of liabilities: current liabilities and non-current liabilities. Employee salaries and taxes are current liabilities, while bank loans, mortgages, and leases are non-current liabilities as you pay the debts over time.
  1. Equity: Equity is the difference between the value of the assets and the liabilities. Equity can include common stock, treasury stock, and/or venture capital. 
  1. Revenue: Revenue is what a business earns from the sales of its products and/or services, such as sales, interest, and royalties.
  1. Expenses: Expenses include all spending required to make a product or provide a service. Some examples are rent, utilities, travel business fees, postage, and stationery. 

Double-Entry Bookkeeping

The double-entry bookkeeping method makes sure that the general ledger of a business is always in balance. In account ledgers, every entry of a financial transaction debits one account and credits another in the same amount. For example, when you pay an expense of $1000, you debit $1000 on the expense side and credit $1000 on the cash side.

This bookkeeping system ensures that the general ledger is always in balance to maintain the accounting equation:

Assets = Liabilities + Equity

What does a general ledger look like?

The image below shows a common template of a general ledger. 

Double-entry Bookkeeping
Source: Double-entry Bookkeeping

As you can see, a general ledger sheet usually has a Journal reference column. Not only does it make it easy to keep track and reconcile if there are any discrepancies, but it also plays a vital role as an audit trail.

After being filled out, an account in the general ledger might look like this:

Source: Accountancy Knowledge 

Listed below are a few resources that offer free general ledger templates that you might want to check out (in case you don’t use accounting software):

After all, it’s you who decides what your general ledger’s format should look like. This depends on your business model, your accounting system, and your country registration as well. 

Why is a general ledger important for your business?

There are several reasons why the general ledger has survived for so long in the standard accounting procedure. Here are the two main reasons that can give you some insight into why:

It’s the foundation for your business’s financial statements. 

Financial statements indicate your business’s current financial health and growth trends in the future. For example, the balance sheet (statement of financial position) can tell you how much your business owns and owes or how much you would have left if you sold all of your assets and paid off your debts. The income statement (profit or loss) shows your revenue and expenses incurred in the fiscal year, deciding if and how much you gain or lose. The cash flow statement lets you know how cash has been allocated and earned over the year, revealing your spending habits, profit generators, and reliable forecasts. All of these reports and information are essential and invaluable to any business. In fact, one of the core objectives of accounting is to produce financial statements. 

All of these statements are made from the general ledger’s data. Accountants extract relevant and important information from the general ledger to create each report. 

It helps you manage expenses better.

Making the right spending decisions can be tricky. Make the wrong one and not only could you lose money, but there could also be additional consequences. To make smart decisions, you need to be fully aware of your spending habits, for instance, which areas of your business consume a lot of resources but don’t translate into a positiveROI? Or which area has the potential to generate more profits but doesn’t get enough attention? You can find the answers to those questions through the general ledger. Keep accurate, organized records and maintain your most useful source of financial advice. 

Plus, you should also pay great attention to every transaction’s receipt so that you can go over and double-check your spendings at any time. A well-managed receipts system means better control over your expenses. Shoeboxed can help you with just that! Shoeboxed is a receipt scanner app that helps you digitize every single paper receipt in just a click. Your receipt data will be automatically extracted and categorized with human verification

Why risk your money with the stacks of receipts lying everywhere in your office? Try Shoeboxed and experience the paperless world. 

General ledger codes – What are they?

If you’re dealing with a large number of transactions per month, it can get really difficult to keep your general ledger organized. That’s when general ledger codes (GL codes) come in. GL codes are the numeric codes that you assign to different accounts, quickening your recording process and making it easier to keep track of your accounts and transactions. 

It’s totally up to you to design your own coding system. For example, many business owners prefer to assign their revenue accounts with numbers starting at 100 and expense’s ones starting at 200 (e.g., 202 – phone payments, 203 – electricity payments). Or you could assign four-digit codes for all your accounts in your own unique way that suits your business. 

This image is an example: 

  Source: Planergy 

Final thoughts 

The general ledger groups and records all financial transactions within your business. It can be difficult to grasp at first, but once you understand and use it, you’ll realize how powerful and beneficial it can be for your business. More importantly, it helps you produce your financial reports – the invaluable tools that allow you to understand and improve your business’s financial health. 

7 Steps of The Accounting Process for Small Business

Accounting is a key element in a business’s financial backbone activities. The accounting process plays a vital role in managing financial transaction records. It also provides business owners and stakeholders reports about their income and expenditures. 

Big companies whose volume of transactions is high take accounting activities as one of their priorities. Big companies with a big accounting team have many accountants of different levels. The force deals with a wide range of finance-related tasks to ensure monetary affairs are handled correctly.

Though small companies don’t have as many transactions as big firms, they still acknowledge the importance of accounting. However, there are fewer accountants to process accounting activities in small businesses. To help accountants in small businesses manage the accounting process in a less stressful way, we’ve compiled a 7-step accounting process guideline.

Why is Accounting Important To Business?

Before we learn about the accounting process, let’s have a quick tour of why accounting is important to a business in so many ways.

Though accounting is a process of dealing with financial-related tasks, it is not just about monetary management. Accounting brings a lot to the table for business top tiers. Here, we’ll look at 5 benefits that any business owner can take advantage of with accounting.

Keeps Your Business Organized

Accounting and business go hand in hand, like peanut butter and jelly. You can’t have one without the other. But why, you ask? Accounting lets you know how much money your business has earned and paid out. 

Though small, your business still has quite a long list of customers and vendors. Which customers haven’t paid you? What debts haven’t you paid yet? You will want to collect payments from customers on scheduled dates and then pay out the debts to your vendors. 

Yet, in reality, things aren’t as perfect as you wish. Sometimes, a customer will pay an invoice late, and their excuse sounds reasonable enough so that you can’t say “no.” However, in the meantime, you still need to process payments to your vendors as you want to maintain good relationships with them. 

Accounting gives you a chance to revisit all your financial records. Based on that, you’ll know which customers you need to collect overdue payments from.

Accounting Helps Evaluate A Business’ Performance

Financial records provide detailed statements that reflect a business’s health. With key information such as expenses, gross margin, and debt displayed on financial records, you know how the business is doing, whether it’s doing good or having a hard time. A good accounting system makes it easier to look back in the past and make comparisons. 

Accounting Improves An Organization’s Decision-Making

Business is never a game of luck, and every decision is made with great caution. Therefore, it’s almost impossible to make the right decisions without accurate information. 

A good accounting system provides insights into a business’s performance and its trajectory. These insights help business owners, investors, and stakeholders make the right decisions for its future. Based on performance’s insight, you will soon execute new strategies to align with the condition of the business.

Companies also use analysis of financial reports to make decisions about hiring employees, making purchases, gifting charitable donations, and more. You may look for a strategic marketer to handle bigger projects, and you’re not sure if your budget can make a good offer for new talents. Or should you upgrade the software for office workers to improve their productivity? Well, all those questions can be answered if you look at the financial reports summarized by the accounting process.

It’s Necessary for Getting Investments or Loans

Investors and lenders need to learn about your business before they decide to join hands with you. As a good negotiator, you make investors impressed by pointing out your business mission and vision. You also prove to them that your business has high financial-potential. 

Well, that’s half the way. Investors and lenders now have positive views about your business, and they will ask for evidence of your performance. You will have to show them your business’s financial statements and records. These statements and records will paint a clearer picture for investors and lenders. Besides, they prove that what you’ve represented is trustworthy. Without evidence of your business performance, you could hardly get a loan approved.

Accounting Helps You Stay Within The Law

Every business’s legal obligation is to pay tax, and any business owner wants the tax procedures to go as seamlessly as possible. Accountants have to handle the organization’s financial matters according to various laws and regulations. 

Good accounting systems and processes will make everything much easier. Besides, they also ensure your business violates no obligations when it comes to money affairs. 

7-Step Accounting Process

Business financial data, including sale transactions, payments to employees and suppliers, interest and tax payments, are all important. Therefore, they must be well-documented in the company accounting books. 

Accountants use accounting principles to record and report business financial data. This accounting process contains 7 steps, with each being a base to build off the next step. Let’s have a look at the 7 steps of the accounting process. 

1. Identify Transactions

The first step of the cycle begins with the job of identifying transactions. There are numerous transactions made by companies with customers, suppliers, and even their employees. Every single piece of documents needs to be properly recorded on the company’s books so that accountants can collect and analyze them in the accounting process. 

However, paper records are susceptible to risk. Risks such as incidents of fire, poor environmental conditions can ruin your piles of files. If your business office catches on fire, your paper records could go up in smoke. Floods, earthquakes, and other natural disasters can also result in the loss of important business documents. If records are stored in moisture-prone areas, they’re subject to mold. As a result, businesses will suffer from a huge loss because of missing documents or defaced bills. 

See also: Why small businesses need to transform paper receipts to digital data

An optimal solution is a piece of software that digitizes and stores all your important transactions on the cloud. Digitized files are much safer than paper files. Besides, they’re highly accessible. Accountants can search, filter, and collect a group of documents with just a few clicks.

Shoeboxed is a cloud-based software that helps businesses turn their massive paper receipts into digital data. You can get your receipts scanned, stored, and organized by your mobile app. It’s simple to install and easy to use. 

2. Record Transactions In A Journal

The second step in the accounting process is to record every transaction in a journal. A journal, or a Book of Original Entry, keeps a historical account of all recordable transactions with which the company has engaged. 

Different accounting methods will dictate different official recorded times for each transaction. Cash accounting method records a transaction only when cash is either received or paid. On the other hand, under accrual method, transactions are recorded when they are incurred rather than awaiting payment. This means a purchase or expense is recorded as a transaction even though the funds are not received, or bills are not paid immediately. 

3. Posting to The Ledgers

After journal entries are made, the next step in the accounting cycle is to post the Journal entries into the ledger. A ledger, also known as Books of Final Entry, consists of all accounts connected with the company. 

The ledger breaks down all accounting activities by account and illustrates them in debit and credit columns. The balance of each account is represented at the bottom after all debit and credit transactions have been calculated. Accountants use ledgers to monitor financial positions and statuses by account. 

4. Unadjusted Trial Balance

The 4th step in the accounting process is to prepare the unadjusted trial balance. The unadjusted trial balance is the listing of all the business accounts that should be calculated at the end of a reporting period. This must be processed before any adjusting entries are made to the balances to create financial statements.

5. Adjusted Trial Balance

The adjusted trial balance is prepared to show updated balances after adjusting entries have been made. This is the 5th step in the accounting process. This trial balance is an important step because it helps identify any errors throughout the previous steps in the cycle. 

The adjusted trial balance ensures that either errors made by computers or transactions unintentionally skipped by accountants have been corrected and updated. For example, when accrual accounting is followed, transactions may have been incurred but are not booked in the Journal. They won’t be recorded until the end of the year, such as entries of expenses. Therefore, sometimes errors can happen if accountants miss a single record.

6. Financial Statements

Following the adjusted trial balance is the step of creating a financial statement. Financial statements such as income statements, balance sheets, cash flow statements, and sometimes statements of changes in equity will be generated.

Financial statements summarize all transactions and accounting activities during the accounting process, thus helping business owners know the actual financial position and the profitability position. 

7. Closing the Books 

Finally, a company ends the accounting process by closing its books on the specified closing date. A report for analysis of performance will be made to help companies improve their performance. This will have a great impact on the company’s future decisions. After closing, an accounting cycle restarts with a new reporting period. 

Final Thought

The accounting process is important for every business’s sake. Because without it, you will not know your business’s actual position and performance. 

However, accounting is a labor-intensive process that involves many tedious tasks. Many accountants say that the accounting workload is overwhelming, and it stresses them out. To reduce the workload of accountants in the accounting process, many business owners have reached out for accounting software as a solution. Computerized accounting programs now do many different things to make business operations and financial reporting more efficient.

Shoeboxed is an online app that lets business scan paper receipts and store them on the cloud. With the help of software, accountants no longer have to identify transactions manually. Start your trial today with Shoeboxed!

Accounting Solution Hack Now Financial Accounting in Business

Financial Accounting as an Accounting Solution? 

Financial accounting is an accounting solution that undertakes the work of recording, synthesizing data, and building financial statements to serve those who need to use accounting information. Information on the status and fluctuations of capital, assets, or physical and monetary flows will be synthesized by a financial accounting team based on data.

The finance and accounting team will include general accounting and data accounting, with a clear and transparent division of work to ensure work efficiency, specifically:

  • General accounting: Collect and process general information about the economic and financial situation of the unit. Through monetary units, general accounting provides data reflecting the use of assets and sources of asset formation of the enterprise.
  • Detailed accounting: Collect and process information according to a specific object on each unit. In detailed accounting, accountants must ensure accuracy to avoid affecting when resuming the data.

Financial Accounting for Businesses

A financial accountant is one of the positions that play an important role in the business, supporting businesses to perform tasks such as:

  • Provides information for those who need to use accounting information such as business leaders, external partners. Therefore, all financial accounting data provided should ensure accuracy, objectivity, and compliance with accounting principles and standards, which is the basis for managers to make appropriate and timely business decisions.
  • The information provided by a financial accountant is information about financial-accounting activities that have arisen, of a general nature, expressed in the form of value. Therefore, businesses can regularly monitor the status of their production and business activities.
  • Makes general financial statements about the business’ performance results of in the reporting period, including clear financial results and effective cost management that help businesses optimize costs and cut unnecessary expenses.
  • Manages risk and insurance for businesses when there are financial fluctuations.
  • Supports business leaders to regulate the financial situation of the business. The information from the financial accountant is also a legal basis to help businesses clearly resolve complaints, disputes, bank loans and investments.

Important Principles to Remember

Financial accounting should comply with the general corporate accounting rules. For instance:

  • Assets and liabilities are initially recognized at cost
  • Consistently apply the selected accounting regulations and methods in each annual accounting period. If there is a change in the method, the accountant should make a detailed explanation in the financial statements
  • To reflect in an objective, factual, complete, and correct manner in the accounting period in which economic, financial, and accounting operations arise.
  • For the preparation and submission of financial statements, accountants must do so accurately and submit them on time. The information and data in the financial statements of the enterprise should be disclosed according to the provisions of Articles 31 and 32 of the Law on Accounting.
  • Accountants evaluate assets and allocate expenditures and receipts in a uniform, careful and accurate manner with no deviation.
  • Preparation and presentation of financial statements must reflect the true nature of each transaction rather than its appearance

Financial accountants need to make monthly, quarterly, and annual reports such as: 

  • Monthly report: Provide VAT report, PIT report
  • Quarterly reports: Provide VAT reports, PIT reports, reports on the use of invoices
  • Annual report: Financial report, PIT finalization, CIT finalization, license tax
  • Accounting book:
    • General diary
    • General ledger
    • Receivable and payable report
    • Consolidate inventory report
    • Management of cash receipts and deposits
    • Management of raw materials, goods, finished products
    • Manage business revenue and expenses

In addition, a financial accountant also performs other tasks such as announcing the issuance of invoices, checking payment papers, etc. 

Management Accounting vs Financial Accounting

ContentManagement AccountingFinancial Accounting 
Purpose Provide information to serve the management of production and business activities.Provide information for the preparation of financial statements. 
Target customerCorporate managers (Board of Directors, Board of Directors). Business managers and external entities (Investors, banks, tax authorities, financial authorities, statistical agencies).
Providing information principlesThere is no obligation, managers are free to decide and adjust in accordance with the needs and management capabilities of the business.Respect the generally accepted and used accounting principles. In other words, financial accounting must ensure consistency according to certain accounting principles and standards so that everyone has the same understanding of accounting principles. Accounting information, especially financial statements, and financial accounting must comply with the provisions of applicable laws, especially the requirements of financial management and the requirements of society through disclosure. mandatory data.
Information’s scopesRelated to the management on each department (workshop, department) to each relevant individual.Involves financial management on an enterprise-wide scale.
Report timelineManagement accountants have more reporting periods: Quarter, year, month, week, day.Financial accounting has a reporting period: Quarterly, annually.
Information featuresEmphasize the relevance and flexibility of data, information is aggregated from many different angles.Reflect past information that is objective and verifiable. 
Statutory CompulsoryManagement accounting is not mandatory.Financial accounting is required by law. It means that the books and reports of financial accounting in all enterprises must be unified.

For small businesses and micro-enterprises to set up a complete and effective accounting system is quite difficult because of resource and cost constraints. Therefore, choosing an accounting service provider is currently the optimal solution for businesses today. Enterprises do not need to spend too much on paying staff salaries, office rental costs, or recruiting full accounting positions such as financial accountant, chief accountant, tax accountant, but still have a reporting system of reports and books in accordance with regulations.

At Shoeboxed, we provide the best receipt tracking and management system. As accountants and business owners using the Shoeboxed system, there is no need to worry about manage paper receipts as well as extracting transaction details from these invoices. Sign up now to use Shoeboxed for free or reach out to our representative for a demo and customized business plan.