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.
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.
- 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.
- 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.
- 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.
- Revenue: Revenue is what a business earns from the sales of its products and/or services, such as sales, interest, and royalties.
- 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.
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.
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:
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:
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.