A good place to start here is to define exactly what a general ledger is and why it’s integral to the life of any bookkeeper or small business.
The general ledger is essentially the bookkeeper’s canvas – a record of every piece of financial data performed by a business. The general ledger simply refers to where the bookkeeper records this information.
A bookkeeper’s job is to use the general ledger to consistently record every single financial transaction on a day-to-day basis. The kind of information this includes might be debits and credits of one of the five main account types. So, let’s say you received a payment from a customer. The bookkeeper would record this kind of information into the general ledger. Or if you paid a supplier, the bookkeeper would also record this, as well as the company’s assets and liabilities.
The general ledger is kind of like the beating heart of every business. Well-maintained and accurate records can tell you a lot about the success of a business, whether it is growing and how it generally performs on a day-to-day basis.
Why do you need a General Ledger?
Once a bookkeeper has recorded daily transactions into a general ledger, an accountant is able to use the data to create financial statements. From these financial statements, an accountant provides a basis for analysis of these details to occur. This can help to determine the next step for your business.
General ledgers tend to be used alongside the double-entry bookkeeping method – this method involves recording every financial transaction twice, as both a debit and credit transaction – which helps give a more accurate and up-to-date picture of how the business is performing. This performance can be neatly summarised as the following equation, central to any bookkeeper’s toolkit:
EQUITY = ASSETS – LIABILITIES
To summarise, here is the bookkeeper’s daily process of using a general ledger:
- The first step is record every financial transaction within each of the categories denoted under one of the five main account types: equity, revenue, expenses, assets and liabilities. Each one of these sections will have an ending balance that lists the financial transactions that have occurred over that given period of time.
- The listed transactions within each categorised account are then summarised within the general ledger, detailing where the business has made and lost cash over that financial period. The general ledger serves to summarise the details of each financial transaction into a trial balance based on the information in each sub-account.
- The general ledger’s trial balance is then used by the accountant to create financial statements.
It sounds like a complex procedure, and that’s because it is! Keeping track of all this information requires a well-organised process with various checks and balances to maintain a high level of accuracy.
The importance of a general ledger, however, can’t be understated – particularly for a small business that wants to analyse how it can use its current financial situation to grow and develop.
The general ledger can be used to make the four main financial statements: balance sheets, income statements, cash flow statements and statements of shareholder’s equity. These statements can be used by the accountants to better understand the current and potential direction of the business. The general ledger can also help problem-solve, detect errors and is a general necessity in the running of any business.
So, what does a general ledger look like?
For small business’ just starting out, it’s quite common to use Microsoft Excel to record all financial information as it provides a simple and clear format for beginner bookkeepers.
Here’s a quick example of what a general ledger could look like for cash flow.
Let’s say, for example, that for this month, your business has spent £500 on supplies. The general ledger entry for something like this would look like the following example:
|Opening Cash Balance
The date and journal entry are fairly simple, they refer to the day which the transaction occurred, and the number refers to how many journal entries have been made within that given period – in this case, a month.
The description gives you the specific information on what transaction has taken place and whether, generally, it is money coming in from somewhere or money going out.
The debit section, regarding this cash flow ledger, would show money coming in, like in the example below, whereas the credit section shows money going out.
The balance, naturally, gives a summary of how the money coming in and going out affects the company’s cash.
Now, let’s say the next day your business receives money owed from a customer, paid in cash, for a service or product provided to that customer. The ledger entry would look like this:
|Opening Cash Balance
|Cash received from client
The debited amount adds to the balance in the far right, whereas the credited amount reduces the balance.
As you conduct more business, more data will need to be accurately added into the general ledger to reflect the business conducted by your company.
Keeping on top of this can be difficult, especially if you choose to do it yourself rather than with a professional bookkeeper, like ours.
The importance of maintaining an accurate record of the financial transactions within a general ledger cannot be understated – accountants can use the financial data inputted into a ledger like this to determine the best business practise that your company can undertake in order to maintain a healthy growth.
If you do decide to go it alone with your bookkeeping, maybe take a look at our other articles to help give you a head-start.
Or if this looks a bit out of your depth, chat to one of our financial experts – they’re qualified to do all the complicated stuff so you can focus on your business!