Running a successful business means controlling a hundred different variables at once. Managing your employees, trying to differentiate your business and making sure the money is there when you need it.
Maintaining a healthy cash flow is key to the financial health of any business. To make money, you have to spend it, so you have to control where it goes. When it comes to keeping accurate financial records, the general ledger is one of the most important tools you have at your fingertips.
What is a general ledger?
A general ledger is a set of numbered accounts that an entity uses to track its financial transactions and prepare financial reports. Each account is a single record that summarises all types of assets, liabilities, equity, income and expenses. A chart of accounts lists all the accounts in the general ledger. In a large enterprise, there may be thousands of them.
What are the parts of a general ledger?
- Balance sheet;
- Income statement;
- Accounts (also individual accounts);
- Account sheets;
- Journal.
During the accounting process, records other than the general ledger are used. These are the journals or daybooks. They are used to record daily transactions, e.g. cash payments on an invoice. Their totals are posted to the appropriate accounts in the general ledger. In accounting software, on the other hand, transactions are usually recorded in subsidiary ledgers or modules.
The totals calculated in the general ledger are then recorded in other key financial reports, namely the balance sheet, which records assets and liabilities. They are also recorded in the income statement, which reports income and expenses. Profit and loss accounts are considered temporary accounts and are closed at the end of the accounting period.
Their net positive or negative balances are added to the equity part of the balance sheet, especially the equity of a private company or the retained earnings of a non-profit company. Also, the figures are obtained by deducting liabilities from assets. In contrast, the accounts included in the balance sheet are permanent accounts that are used to keep track of the up-to-date financial situation of the enterprise.
General ledger accounts are not budgetary accounts. They show actual expenses or revenues rather than the amounts provided for in a budget.
Types of general ledger accounts
In general, the general ledger contains accounts corresponding to both the income statement and the balance sheet for which they are intended. The income side of the income statement may include totals of general ledger accounts for cash, inventory and accounts receivable owed to the business.
These are sometimes divided into departments such as sales and services and related expenses. The expense side of the income statement may be based on general ledger accounts for interest expense and advertising expense. Other general ledger accounts summarise transactions for asset categories such as machinery, assets, accounts payable or trade loans.
Other types of general ledger accounts
While the above accounts appear in all general ledgers, other accounts can be used to follow specific categories, perform useful calculations or group accounts. The latter type is called a reconciliation account.
Classifying the general ledger
The Vouchers
The recording of all receipts forms the basis for the allocation and posting of amounts to specific accounts. This includes, for example, all invoices issued, invoices received cash receipts and bank statements.
The land register
All business transactions are recorded in chronological order. This includes opening entries, current entries, preparatory closing entries and the closing entries themselves. These are transferred to the land register, also called the journal or diary.
The general ledger
The control of a company is only completed with the general ledger. Once the temporal allocation has been carried out, the general ledger deals with the factual allocation of all business transactions entered into the land register.
The subsidiary ledgers
To be able to make accruals and deferrals and also to have a better overview of the individual items of the general ledger, there are also so-called subsidiary ledgers. For example, the payroll ledger, the investment ledger, the current account ledger, the cash book or the book of outgoing invoices.
Double-entry bookkeeping
According to the rules of double-entry bookkeeping, each entry in the general ledger must appear in two places: once as a debit and once as a corresponding credit. And the two together must equal zero.
The terms debit and credit have no everyday meaning, and whether each is added to or subtracted from the total of an account depends on the type of account. For example, debiting an income account is a capital increase, while the same action on an expense account is a capital decrease.
General ledger reconciliation
At the end of each accounting period, the balance sheet total is calculated by listing all debit and credit accounts and their totals, separating debit and credit accounts. The debit and credit accounts are then added together to ensure that they are equal.
If they are not, the accountant can look for errors in the accounts and the journals. Companies use a general ledger reconciliation process to find and correct such errors in the accounting records.
Conclusion
A constantly changing business world is also subject to dynamic requirements and needs special planning. The general ledger, and accounting in general, must always meet these requirements. Understanding the basics of bookkeeping is the most important thing. If you have any questions on this subject or need accounting services, please contact our tax lawyers in Barcelona by phone or email.
