The general ledger of your firm is critical in predicting your company’s financial health. Your firm might suffer if you’re slacking off on your general ledger entries.
So, how’s the general ledger of your little business? Is it in need of some tender care? Read on to discover all you need to know about the general ledger, from its definition to the many sorts of accounts that make up a ledger.
General Ledger: What is It and What Does It Do?
The cornerstone of your books is your general ledger. Keeping track of all of your transactions in a ledger is essential.
It is your job to keep track of the debits and credits in your ledger Your company ledger must be in balance at all times. Inaccurate financial reports might be the result of credit and debit balances that are out of whack.
There are five primary divisions in a corporate ledger. Sub-categories and sub-ledgers may also be used to provide more information about business transactions.
Accounting Records are Kept in a Bookkeeping Ledger
Accounting functions like that of a file cabinet. A name is assigned to each account. You must also keep track of any linked transactions in each of your accounts.
The accounts in your general ledger are derived from the accounts in your financial statement (COA). Your company’s COA categorizes all of your business activities.
It’s fairly uncommon for people and companies alike to utilize ledgers to keep track of the money they’re spending or receiving.
Businesses, on the other hand, must keep more extensive records to perform financial transactions legally and properly, while individuals may depend on their banking apps to provide them an overview of how much money they have coming in against how much money they have going out.
A general ledger template is a useful tool for tracking a company’s financial health and progress over time, and that’s exactly what you’ll learn about in this blog article.
The general ledger is the core of a company’s accounting system and maintains all of its accounts and transactions. In most cases, assets, liabilities, equity, income, and expenditures make up the five major components of a financial statement. Accounts payable and accounts receivable are included in these categories, as well as the company’s general ledger, which records the amount of money that is credited and debited regularly.
It’s important that the general ledger, like a personal checkbook, be constantly balanced between the credit and debit sides since the data recorded contains all of the account information about a firm during its existence that’s required to create the financial statements.
All financial transactions are recorded in the general ledger so that the organization can correctly account for and predict its financial health. When it comes to accounting, think of the general ledger as the company’s central database, from which all other financial papers draw their data.
Let’s take a closer look at the various components of the general ledger:
Accounts Payable
The general ledger is divided into five sections, each of which is referred to as an “account.” the subcategories include
a slew of resources
An asset is a corporate resource that generates value and is held by the company. Cash, inventory, property, equipment, trademarks, and patents are all examples of assets.
Secondly, liabilities.
Debts the company owes now or in the future are known as “liabilities.” Employee salary and taxes are examples of current liabilities, whereas bank loans or lines of credit and mortgages or leases are examples of future obligations.
The third point is equity.
The difference between the company’s assets and liabilities is referred to as its equity. Negative equity may occur if a firm has more obligations than assets. Depending on whether the firm is held privately or openly by its owners and/or shareholders, equity might take the form of common stock, stock options, or stocks.
Profits Generated from the Sale of Goods and Services
A company’s revenue is the money it makes through the sales of the things it makes or the services it provides. Customers or other companies may pay a firm for products or services they get, such as sales or interest.
Assumptions About Costs
Expenses are the sums of money that a company shells out to acquire a product or service. There are a variety of expenses that might be incurred, such as rent, utilities, travel, and food.
The “chart of accounts” on the first page of the general ledger lists the names of the accounts that are listed in the ledger. The term “account ledger” refers to the record of a single account in the general ledger.
Sub-Ledgers
Each account’s sub-ledgers give additional information about the entries in the account ledgers, such as whether they are debited or credited by cash, accounts payable, accounts receivable, etc.
Double-Entry Financial Accounting
For a company, the general ledger is constantly in balance using the double-entry accounting approach, as you would manage your personal checkbook. Account ledger entries debit one account and credit another in the same amount for every financial transaction. A debit from another account ledger would be required to indicate a credit from the Assets account ledger.
The General Journal vs. the General Ledger
Date-based transactions are recorded in a generic diary. Initially, a company’s financial transactions are documented in a general journal. The particular amounts are then entered into the appropriate general ledger accounts. All financial transactions are recorded and balanced in the general journal, which is often referred to as a book of original entries.
Trial Balance vs. General Ledger:
The general ledger’s account names and balances are reported in a trial balance, an internal report. It’s a simple way to see whether accounts have credit or debit balances, which helps keep the general ledger more accurately balanced.
Financial Statements vs. Accounting Records
By determining whether the company’s accounting equation is in balance, a balance sheet gives a fast view of the company’s financial health. To answer the accounting question above (Assets = Liabilities + Equity), the balance sheet gets the figures from the accounts in the general ledger and reports them on the balance sheet. While general ledgers are used internally by firms, balance sheets are more often employed when they are being assessed by banks, creditors, or investors.