Learn about the Basics of a General Ledger
What is a General Ledger?
The general ledger is the basic record for accounting. It will be the core of any company’s record-keeping system. The general ledger is your go-to document where you can determine the fiscal health of the company you are performing accounting for. You will keep the general ledger, and it will serve as a record (permanently) for your company. When you need to create a balance sheet, most of the information you will need to do this will be found in the general ledger.
What Goes Into a General Ledger?
The general ledger tracks five categories. These categories are: Assets, Liabilities, Owner’s Equity, Revenue, and Expenses. Here’s a breakdown of each of these categories:
Assets - Assets are those things that add value to your company. There are fixed assets, like property, and there are assets that change in value like your bank account. Assets are your resources. They can be used to purchase necessary goods.
Liabilities - A liability is something you owe money on, a financial obligation that has come about through past transactions. Liabilities include loans and credit cards.
Owner’s Equity - Owner’s equity is the amount that will appear on your balance sheet that determines the value of your business. Equity is equivalent to company assets less company liabilities.
Revenue - Revenue is the income a company generates through its various business activities. You may hear revenue referred to as “top line” since on a company’s income statement, it occurs on the first line.
Expense - Expenses are the outflows of money that come about when you pay payroll, utilities, or purchase office supplies. They differ from liabilities in that they are not the whole debt (but payment on debts might go under expense).
In addition to these five basics of a general ledger, there are subsidiary ledgers with amounts that wind up in a general ledger:
- Accounts Receivable - This is the register of outstanding invoices for money that is expected to come in.
- Accounts Payable - This is the register of outstanding invoices for money expected to go out.
- Petty Cash/Cash - This tracks cash spent
By keeping accurate records, you can ensure that the business finances will be on track.
How is a General Ledger Set Up and Maintained?
It is important to note that you may have many different journals that track different amounts in your business. Each journal records transactions. For example, you may have a sales journal, a cash disbursement journal, a purchases journal, a receipts journal, etc. You will take the information from these journals and place the information into your general ledger.
The first step of setting up a general ledger is to open your ledger. This amount will not be equal to zero. Instead, you will have any tangible assets and invested cash listed as assets. Additionally, any liabilities already accrued (startup loans, mortgage, etc.) will be listed.
Once you have opened a ledger, it is important to maintain the accounting cycle. The accounting cycle includes the following steps:
- Record all business transactions in the appropriate journals - update this daily.
- Ensure that all debits and credits are posted to the general ledger.
- Make any needed adjustments for items such as bad debts or accrued interest into the general ledger.
- Once you’ve accounted for all revenue and expenses, you can post net profits in the owner equity category.
- Prepare any of your required financial statements at the end of business periods.
Keep current on the accounting cycle to make less work for yourself in the long run.
Can a General Ledger Be Computerized?
In short, yes, you can computerize your general ledger. You can keep a general ledger in Microsoft Excel. Alternatively, you can use one of the many helpful accounting programs that are available like Quickbooks or LessAccounting. When looking for a computerized accounting software alternative to keeping a general ledger, it is important to insure that the program offers the journals and tracking you need for your business records.
This post is part of the series: General Ledger Basics and Examples
Learn how to prepare, read and analyze general ledgers. Also, find examples and free templates you can download for personal or business use.
