GENERAL LEDGER: THE BACKBONE OF ACCOUNTING AND ITS BENEFITS ON SMALL BUSINESSES

“ Ledger is the principal  book of accounts among merchants, in which the entries in all other books are entered”

General ledger in accounting is preferred by businesses, let it be of any scale, to record its transactions and thus it is also referred to as ‘the book of final entry’. They are recorded as credits or debits using a double-entry technique, which is verified by the trial balance. The general ledger of your organization is essential for forecasting the financial health of your business. However, if you get behind on your general ledger entries, your business may suffer.

Using a General Ledger adds many benefits for businesses, as it makes an accurate record of the transactions involved. It provides a clear picture of the financial well-being of your enterprise.

Now let’s discuss what really is a General Ledger in a detailed way. Here this write-up can help you in having a clear understanding of this important concept in accounting. 

What is a General Ledger?

As the topic for the discussion, our focus is on the term General Ledger. The phrase “keeping the books” refers to keeping track of the general ledger. What is a ledger exactly, and why do you need one?

 A general ledger serves as the cornerstone of the system used by accountants to store and arrange the financial information needed to produce the company’s financial statements. With debit and credit account entries verified by a trial balance, a general ledger serves as the mechanism for maintaining a company’s financial data. It offers a record of each financial transaction that occurs during the course of an operational company’s existence and maintains the account data required to create the company’s financial statements. Transaction data is divided into accounts for assets, liabilities, owners’ equity, income, and expenses according to the type of transaction. 

A company’s double-entry accounting system is dependent on the general ledger. Businesses that utilize the double-entry accounting approach, in which every financial transaction impacts at least two sub-ledger accounts and each entry has at least one debit and one credit transaction, use a general ledger.

General ledgers are used by accountants, company managers, analysts, investors, and other stakeholders to evaluate a company’s financial performance. 

There are around three types of the ledger:

•  Sales Ledger – The corporation preserves the transaction of selling the items, services, or cost of goods sold to customers in the sales ledger. The idea of sales revenue and an income statement is conveyed by this ledger.

•  Purchase Ledger – A purchase ledger is a record of transactions involving the acquisition of goods, services, or both from other companies. It makes public the sum that the corporation paid to other companies.
•  General Ledger: The two forms of the general ledger are the nominal ledger and the private ledger. The nominal ledger contains data on costs, earnings, depreciation, insurance, etc. Additionally, Private Ledger provides private information such as capital, wages, and salaries. Not everyone has access to the private ledger.

How does a General Ledger work?

In order to organize and maintain the financial data needed to create the company’s financial statements, bookkeepers create a general ledger. According to the structure of accounts for the business, exchanges are displayed on unique sub-ledger accounts.

Following the completion of the addition of the exchanges to the general ledger, the accountant creates a trial balance, which serves as a report of the balance of each ledger account. Transactional information is categorized within a general ledger into assets, liabilities, income, expenses, and owner’s equity. The accountant creates the trial balance after closing out each sub-ledger. The balance sheet, income statement, statement of cash flows and other financial reports for the company are made using the information from the trial balance.

In order to construct the financial statements, the trial balance is first reviewed for errors and updated by posting additional crucial areas.

What is a General Ledger account?

An important element of a general ledger is a general ledger account. 

A company’s ledger account is a journal in which it keeps track of all transactions and financial statements. The general ledger account for the company is set up under the general ledger, and the balance sheet is divided into various accounts such as assets, accounts receivable and payable, stockholders, liabilities, and equity, as well as revenues, taxes, expenses, profit, and loss, as well as funds, loans, bonds, and stocks.

The different types of ledger accounts are permissible for businesses and these are:

• Assets (cash, accounts receivable, inventory, fixed assets, notes receivable)
• Liabilities (accounts payable, accrued expenses, notes payable)
• Equity (owner’s or member’s capital, distributions, common stock, paid-in capital, treasury stock, dividends, retained earnings)

• Operating revenues (sales, service fees)
• Operating expenses (wages and salaries, rent expense, depreciation, utilities, etc.)
• Other income and expenses (investment income, gains and losses on disposal of assets, interest expense)

In relation to these accounting components, transactions exist. The assets of the business include things like cash and accounts receivable. Every asset will be assigned a separate GL account on the ledger.

Benefits of having a General Ledger?

The advantages of a general ledger for the business are numerous.

1. Preparation of Trial Balance- Trial balance preparation is impossible without ledgers, which is the first advantage of ledgers. Because the ledger account balance is used to prepare a trial balance. Furthermore, mathematical correctness is not feasible.
2. Preparing final positions- We are aware that a Trial Balance is the only way to prepare a final account (i.e., Trading Account, Profit and Loss Account and Balance Sheet). Therefore, it is difficult for us to construct final accounts if the ledger accounts balance is not obtained from a trial balance.
3. Determining Results of Each Account: Based on the principles of Double Entry, the results of each account can be determined from the ledger.
4. Collecting Information: The ledger may be referred to as a repository or storehouse for numerous transactions.
5. Application of the Double Entry System: The Double Entry System is only complete if we publish the journals to the various ledger accounts.
6. Indirect Benefits of Maintaining Secret Accounts: After properly recording in a ledger account, the specifics of a classified account may be disclosed.
7. Statistical Information Presentation: The sources of statistical information used by management in decision-making are the ledger accounts and their related balances.

What is the purpose of a General Ledger for small businesses? 

You’ll need a system as a business owner to make sure you’re appropriately handling the financial data for your company. The general ledger is the system’s cornerstone for many business owners. Since a general ledger offers an exhaustive record of your company’s financial transactions, it should be used as your master accounting document. 

All business types and sizes need general ledgers, but the way they are put together varies depending on the circumstances, despite the fact that the core idea behind them is universal. Balance sheet accounts make up a general ledger. These comprise the capital accounts, liabilities, and assets. Additionally, it includes accounts from the income statement, such as those for revenues and outgoings.

You must therefore identify each account before you can establish a general ledger. Among these are payroll taxes, owner’s equity, depreciation, and inventory. The general ledger’s sub accounts will then be created from each of those accounts.

A trial balance must be prepared once you’ve decided which accounts to include in the general ledger. All general ledger accounts’ balances are shown in the trial balance, a document. This will allow you to guarantee that each transaction will debit one account and credit another.

The Accounting Equation, Assets = Liabilities + Shareholder’s Equity, must be accurate once everything has been added to the trial balance. If the calculation doesn’t make sense, you may be sure that one of your account records contains an error. This is due to the fact that each debit on one account necessitates a corresponding credit on another account, as was previously indicated.

General ledgers are the master financial statements that track all of your company’s financial transactions. The general ledger is unparalleled in terms of accounting for finances and maintaining a record of every transaction in business.

Instead of keeping separate diaries for various types of transactions, the majority of accountants and bookkeepers utilize accounting software nowadays. A credit and a debit are recorded for each entry in the general ledger with daily transactions and journal entries.

To manage their books and comprehend their financial performance, you fortunately don’t need to develop a thorough understanding of how the general ledger functions. Simply grasping the fundamentals of double-entry accounting will be enough, and you should work with an accountant who can provide financial statements that will allow you to assess the efficiency of your company’s operations and the state of your finances.

So I hope this article was resourceful in acknowledging you about General Ledger in a detailed manner. Along with it, the different types of the ledger, how beneficial it is in the accounting field, the basics one needs to know, then how it is productive for small businesses are deliberated.  In the following article, more diverse information regarding accounting will be discussed and cleared. Until then stay in touch with us, and I hope you are healthy and happy. Stay radiating positivity and count on us for more information.

You May Also Like- ACCOUNTING: IMPORTANT TO MY BUSINESS?