If you decide to research double-entry bookkeeping, you’ll probably come across the term “trial balance” often. Trial balances are a financial tool specific to double-entry bookkeeping. If you choose to set up a double-entry ledger, you should be ready to prepare trial balances regularly. That’s because all of your company’s financial reporting—including its balance sheet—are prepared using information in the general ledger. As discussed before, the financial entries are first recorded in a general journal.
This categorization and organization of transactions in the general ledger enable businesses to track and analyze their financial data efficiently. It provides a clear overview of the company’s financial position and allows for accurate reporting and decision-making. At its core, the general ledger is a collection of ledger accounts, each representing a specific aspect of the company’s finances.
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So, you’ve got one notebook for cash transactions, another for sales, and maybe even one for “Office Snacks” (because who doesn’t need a stash of gummy bears at 3 p.m.?). The general ledger is the binder that holds all these notebooks together. The general ledger accounts report does not show accounts with 0.00 balances unlike a chart of accounts which shows every single account.
In this case, credits increase the liability balance (more IOUs), and debits decrease it (paying off debts feels good, doesn’t it?). For example, if you buy a new laptop for your business with cash, your equipment account (an asset) increases, and your cash account (also an asset) decreases by the same amount. One account gets debited, the other gets credited, and the books stay balanced. Alright, time to tackle the not-so-scary beast known as double-entry accounting. Don’t let the fancy name intimidate you—it’s basically a way to make sure your books are balanced, so you don’t end up scratching your head wondering where all your money went.
Later in the accounting cycle, you create a trial balance with the general ledger to ensure everything balances. Most general ledgers also include columns for each debit and credit amount and a brief transaction description. See, you also have several journals and subledgers for certain repetitive transactions, as defined by your chart of accounts. These accounts do not carry over to the next accounting period since they close at each month’s end. If the debit and credit balances at the end of the worksheet are the same, that means there aren’t any mathematical errors in the ledgers. The general ledger functions as the central nervous system of a company’s financial operations, enabling businesses to monitor performance and make informed decisions.
Have more time to work on what you love when you spend less time on bookkeeping. Accounts payable is the money a company owes to its suppliers and vendors for products and services purchased on credit. When a company buys something from a vendor, it typically doesn’t pay for it immediately. Journal entries will also contain the date of the transaction, a reference number, and a description explaining what type of financial activity took place.
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- Having detailed revenue accounts helps you understand which of your products or services are making bank and which might need a little TLC or a swift kick to the curb.
- In addition, each transaction’s debit amount(s) must be equal to its credit amounts.
- Running a general ledger report lets you see a summary of all activity over a specific timeframe in detail.
General Ledger (GL) accounts contain all debit and credit transactions affecting them. In addition, they include detailed information about each transaction, such as the date, description, amount, and may also include general ledger accounts some descriptive information on what the transaction was. Only at the end of an accounting period do you perform a few entries to post the total balances in these subledgers to the general ledger. These are posted to control accounts, which essentially summarize the total amounts from these subledgers without the nitty-gritty details. In the olden days, before computers and software, accountants and bookkeepers recorded every financial transaction by hand.
Nobody enjoys dealing with taxes (except maybe tax accountants), but your general ledger makes the process less painful. It keeps a detailed record of all your income and expenses, ensuring you report accurate figures to the tax authorities. Whether you’re filing income taxes, sales taxes, or payroll taxes, the general ledger has got your back. It’s the stage where debits and credits perform their delicate dance, ensuring that every financial move is properly recorded and balanced.
- Sub-ledgers are particularly helpful for businesses with a high sales volume because you can segment your financial transactions into digestible categories, making managing your financial data easier.
- An asset would have the prefix of 1 and an expense would have a prefix of 5.
- Double-entry bookkeeping is the most common accounting system for small businesses.
- This is exactly why the document is also considered the principal book of the accounting system and is used as a basis for the creation of accounting reports.
Without it, your accounting records would be a hot mess, and nobody wants that. Owner’s equity is the portion of the business’s assets that you or your shareholders own. When your business records revenue from sales, this will increase owner’s equity because it means that the company has earned more money. On the other hand, if the company incurs expenses, this will decrease the owner’s equity because it means there’s less money available for you to draw out. “As transactions in your business occur, they are noted in the general ledger under each account using double-entry accounting.
General Ledgers and Double-Entry Bookkeeping
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A general ledger takes information from the journal and categorizes it into the appropriate accounts. Each entry may also include subaccounts to provide further transaction details. To get started, create a journal and record each business transaction as it occurs.
Then, you summarize that information in a master notebook—the general ledger. If bookkeeping and accounting are done correctly, the sum of the trial balance’s debit side and credit side will match. If it doesn’t, it is an indication of discrepancies or errors and will require rectification.
Businesses rely on general ledgers for financial transparency, informed decision-making, financial statement preparation, tax compliance, error detection, and accurate business valuation. The general ledger functions as the financial backbone of any business, providing structure to what would otherwise be a disorganized collection of transactions. The general ledger might not be the flashiest part of running a business, but it’s undeniably one of the most important. It keeps your financial affairs in order, helps you make informed decisions, and ensures you’re in good standing with everyone from investors to the tax man. So embrace the general ledger—give it the attention it deserves—and watch your business thrive.
The general ledger is crucial because it helps you (and anyone else who cares, like investors or that nosy accountant) assess your company’s financial performance. It gives you a clear picture of where your money’s coming from and where it’s going, which is kind of important when you’re trying to make sound financial decisions. Plus, it’s the foundation for those all-important financial statements—without it, your income statement and balance sheet would be about as reliable as a chocolate teapot. A general journal is the first step for recording your business transactions in chronological order.
