A General Ledger (GL) is a grand list of a company’s accounts, where every financial transaction is recorded. General Ledgers use the double entry system of accounting and is used to create financial statements.
A General Ledger (GL) consists of every financial transaction recorded throughout any given account period (also known as account cycle). Nowadays, businesses record their account information electronically on software such as QuickBooks. However, before records were stored electronically, businesses hand wrote all of their transactions in what we call “books” for each account. All of these books combined were called the General Ledger (GL). General Ledgers use the double entry system of accounting. This means that for every transaction, it will be recorded on two different accounts. After a General Ledger is complete, it is then used to create financial statements.
Fortunately, accounting based software exists today. This means that business owners, accountants, or bookkeepers can spend less time manually inputting financial transactions, spend more time growing their business, and analyzing that data in order to make important financial decisions. There are tons of affordable accounting software options on the market today such as QuickBooks. We recommend taking the time to research what type of features that are offered throughout the software that best fits your company’s needs. There is no need to buy the most expensive software with a plethora of features that do not apply to your company. Last but not least, we recommend having an accountant who is familiar with that software set it up for you. Improper setup can cause hours of pressing the ‘delete’ button.
Preparing for a General Ledger.
Before anything is posted in the General Ledger, it is first recorded in journals also known as the “Books of Original Entry”. Nothing is posted in the GL before being recorded in it’s original journal. Every financial account has an assigned journal to it and every time you record a transaction, it is called making a “journal entry”. Generally speaking, this is where a bookkeeper comes in handy. Although this job may sound monotonous, it is incredibly important. Depending on the size of your company, you may have a team of bookkeepers inputting daily transactions or a sole bookkeeper.
Double Entry System of Accounting.
Every time a transaction is recorded, it will be recorded twice in two separate accounts. It will be debited to one account and credited to another. Every account is going to have two columns: Credits to the left and debits to the right. Depending on the nature of the account, they will either increase or decrease. There are five types of main accounts: Assets, Liabilities, Income, Expenses, and Equity. Remember, for every transaction you record (whether that may be a sale or purchase) it’s going to be recorded in at least 2 of those main 5 accounts. For example: Say you own a convenience store and you are out of beer. You buy $1000 worth of beer wholesale from the factory- your cash account is going to decrease $1000. This is shown by crediting the account on the right hand side for that amount. Now, you have $1000 worth of beer to sell, so your asset account is going to be debited on the left hand side for that amount. Now the books are balanced. If the books come out with a number other than 0 by the end of a cycle, an error was made during a journal entry.
It’s the end of the accounting cycle and you are ready to create your financial statements. More times than not, some errors were made during journal entries. Not to worry! This is why we have a trial balance. The word “trial” is exactly what it sounds like. It’s a list of all the accounts with the balances next to them. This is where you can see if any any mistakes were made when debiting and crediting accounts using the Double Entry System of Accounting. Remember, the balance must be zero or an error has been made. By completing a trial balance, you are one step closer to producing accurate financial statements.
The larger your company grows and depending on the nature of your sales, (a housecleaning company vs. a supermarket), your accounts will differ. There is no rule of thumb when it comes to which type of accounts you must have. Obviously, the housecleaning company which offers 1 type of service is going to have a much less complicated GL compared to the chain supermarket that has hundreds of vendors and employees. Be prepared for when your company grows!
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