What Is a General Ledger, and Why Do You Need One?

1. What Is a General Ledger, and Why Do You Need One? Traditionally, accountants recorded financial transactions in the general ledger by hand, using the double- entry accounting method. With the advent of computers, recording transactions became simpler. No longer did you have to record general ledger in books; you could use excel sheets and sophisticated accounting software. While the way you record transactions has changed, the importance of the general ledger remains. It’s an essential accounting record for creating financial reports which are crucial for evaluating business health. An Overview of the General Ledger and how it Works The general ledger is a master accounting document providing a complete record of all the financial transactions of your business (accounts receivable and accounts payable). It helps you look at the bigger picture. Accounts include assets (fixed and current), liabilities, revenues, expenses, gains, and losses. Before we continue, let’s look at a few key concepts that will help you better understand the general ledger and how it works. These accounting concepts refer to double-entry accounting, the basic accounting equation, and journals. Some may find them slightly overwhelming, but overall they’re fairly straightforward. If I can understand them (someone who switches off at the mere mention of accounting terminology), then you can too! I’ve broken them down step-by-step. 1. DOUBLE-ENTRY ACCOUNTING There are two primary types of accounting methods. The single-account method works just fine if you’re a solopreneur. But, the double-entry accounting method makes it easier to prepare financial statements and improves accountability. So, switching to the double-entry accounting method may be wise. Regardless of what you decide works for you and your small business, general ledger accounts use the double-entry accounting method or financial reporting: An entry to one account requires an opposite entry to another account. Rephrased: Every time you entered a debit on a general ledger account you also have to enter a credit on another general ledger account. A debit is an accounting entry that increases an asset, expense, or dividend account and decreases a liabilities or owner’s equity account, while credits decrease them. Alternatively, credits increase liability, revenue, and equity accounts, while debits decrease them Because creditsand debits lead to the formation of an account that resembles the letter “T,” general ledger accounts are also known as T accounts. You find debits on the left and credits on the right.

2. We’ll look at a few general ledger examples shortly, but first, let’s review journals and the accounting equation. 2. JOURNALS Financial transactions are first recorded in journals before they’re transferred to a general ledger. If a general ledger is the master of all financial reports for looking at the bigger picture, journals are the documents for analyzing the finer details of your business. Journal entries are usually recorded on a daily basis and, as with general ledger accounts, you’ll have a credit and a debit for each entry. While there are 7 types of journals, the four most common ones are the sales journal, purchase journal, cash receipts journal, and cash payment journal: The Sales Journal is for recording credit sales. For example, customers (debtors) who bought on credit or account. The Purchase Journal is for recording credit purchases by your business. Examples are supplies and equipment. The Cash Receipts Journal is for recording all cash inflows, such as cash for services rendered. The Cash Payments Journal is for recording all cash outflows. For More Information Click Here Contact Us +91 9989971070