General ledger accountants responsible for the upkeep of financial records use general ledgers, though you can also maintain the general ledger yourself. But what is a general ledger and why do you need one?
What Is a General Ledger?
A general ledger is an accounting document that holds all the records of each financial transaction of a company. It provides information needed to prepare financial statements crucial for evaluating financial health and government reporting.
You can outsource your accounting and leave the task of maintaining your general ledger to a general ledger accountant who is trained to spot errors and potential issues, but as an owner of a small business, understanding the basics can be very helpful.
At Sphere Accountants & Advisors we aim to keep our clients well-informed of their outsourced bookkeeping and accounting, from explaining each item to giving advice because the health of your company depends on good accounting practices.
This is mainly why maintaining a general ledger is crucial to your business’ success. General ledgers provide an overview of all your company’s accounting transactions and will make it easy to spot and correct financial drawbacks well ahead of time.
Explained below, is how it works.
How It Works
General ledgers store and organise financial and transaction data classified into accounts for assets, liabilities, owner’s equity, revenues, and expenses.
It typically uses the double-entry bookkeeping method and can be maintained using a physical book or accounting software depending on your preference and needs.
Double-entry bookkeeping is one of two types of accounting method: the other one is single-entry bookkeeping.
In double-entry bookkeeping, an entry on one account requires an opposite entry on another account. In other words, every debit on one column should have a credit on another column.
The basis of double-entry bookkeeping is the accounting equation, Revenue−Expenses=Net Income (NI) or Net Profit. This method ensures the equation is balanced with the sum of debits for all accounts equal to the sum of credits.
Also, all transactions on general ledgers are first recorded on journals.
Journals are records of financial transactions in order by date. If general ledgers are the master document that provides an overview of the company’s financial transactions, journals provide the finer details with its daily entries.
Journals have four common types: sales, purchase, cash receipts, and cash payment.
So, for example, if you paid an expense of $500, you must debit “expense” and credit “cash” in both the journal and the ledger. Similarly, if you received $800 in cash, you must debit “cash” and then credit the “accounts receivable” in both the journal and the ledger again.
If you don’t use a general ledger and your accounts don’t balance, it would be difficult to track down the source of imbalance.
Without general ledgers, you won’t know right away how much your current cash account is. You can neither immediately tell if you’re losing money nor find solutions as to why you are. Financial decisions without general ledgers means making critical business decisions with blinders.
Here are other reasons general ledgers can make your finances in tip-top condition.
Why Your Business Needs a General Ledger
- It makes lodging tax returns easy with the expenses and income in one place
- It shows real revenue and expenses so you stay on top of your spending
- It helps you identify unusual transactions, cause of spike in expenses and other accounting issues
- It helps you recognise and stop fraud immediately
- It makes analysis of profitability and liquidity easy
General ledgers can be very helpful in your business. Everything you need to produce a financial statement that is use to evaluate the overall financial health of your business is found inside a general ledger.
If you need help with maintaining your general ledger or if you need a general ledger accountant or a financial advisor for your business, contact Sphere Accountants & Advisors today. We’d be glad to help!