What is General Ledger and How to Know If Your Small Business Ledger is Being Kept Well?

If you belong to the world of business in any capacity, you might have already heard words like “maintaining books”, “Bookkeeping”, or “Business Ledger”. A no-brainer way to understand the meaning of these terms is the physical or virtual books kept by a business to keep the record of its transactions. In proper accounting terms, a general ledger represents the record-keeping system for a company’s financial data with debit and credit account records validated by a trial balance, as defined by Investopedia.

A properly maintained record of financial dealings by a business can provide valuable insights about the strengths and weaknesses, monetary and otherwise. Let’s talk a little more about general ledgers and why they are so important, and then we will discuss some quick and easy tips for you to improve your bookkeeping irrespective of your business size.

General Ledger Defined

This form of bookkeeping involves double entry, which in layman’s terms means that you record both sides of a transaction. For instance if you have bought a new laptop from your cash account, you will record a reduction in your cash assets, but along with it you will increase your long term assets as well. This means that general ledger not only tells you how much you spent or earned, but also what you spent on and what exactly brought you your revenues. The general ledger serves as the foundation of your company’s entire accounting and finance department.

The tricky part is that the double entry system needs to be balanced at the end of the day, or any given period. The credited and debited amounts should be equal to the credited and debited assets and liabilities. Any discrepancy between the two sections of the general ledger indicates either miscalculation or outright corruption. There are five main sections of a general ledger, namely Assets, Liabilities, Expenses, Equity, and Revenue.

One note of caution here would be to know that general ledger is different from general journal, whereas the latter is the chronological record of transactions. Ledger is supposed to balance the transaction while the journal is only to ensure no transactions go missing at the time of reconciliation.

Why is a General Ledger Important for a Small Business?

While larger companies may require preparing ledger accounts by law, even smaller businesses need detailed records of their transactions to ensure proper spending of resources, prevent corruption or financial leakages, and to better understand the financial strengths of their business. The significance of general ledger resides in the details that it captures from day to day transactions. Every category within general ledger is further divided into sub-accounts to shed more light on transactions. For instance, the asset category is subdivided into checking accounts, savings, petty cash, account receivables, and stocks (or inventories). Likewise, liabilities constitute accounts payable, tax liabilities, and payroll details.

Expense account is perhaps the most detailed with subcategories of cost of goods sold, insurance, equipment, supplies, rent, and other miscellaneous bills. Equity records owners’ investments, common stocks, and retained earnings, while revenue takes care of sales, other incomes, as well as interest incomes. These details not only highlight the areas in the business that are generating most revenue but also those that are creating the highest pressures on sources. With regular reconciliation of general ledger, companies are able to define the direction of their future business strategies and thereby steer clear of challenges while focusing more on departments and products with highest growth potential.

How to Prepare an Accurate General Ledger?

Taking assistance from BizFilings, there is a nine point guide for closing your books:

  •         Post entries to the general ledger.
  •         Total the general ledger accounts.
  •         Prepare a preliminary trial balance.
  •         Prepare adjusting journal entries.
  •         Foot the general ledger accounts again.
  •         Prepare an adjusted trial balance.
  •         Prepare financial statements.
  •         Prepare closing entries.
  •         Prepare a post-closing trial balance.

The process of preparing a trial balance and checking for errors is an even longer one, but the good news is that you don’t have to do all of this – or potentially none of this – manually. Any modern day up-to-date software will account for all the processes, leaving the nominal data entry on your part as and when transactions take place. Even for that, if you have a computerized system that automatically logs additions and subtractions in your financial assets and inventories, you will have your work done already. However, an even better, and always advisable, the course of action is to take assistance from an external company. Business process outsourcing (BPO) companies deal with the entire bookkeeping processes from data entry into general ledgers to the preparation of financial statements as per regulatory requirements. They also provide the said services at a much lower cost than you would incur in doing all this in-house. The possibility of errors is also much less with BPO companies, because they not only have the highest qualified professionals but they also possess state-of-the-art software for all your accounting needs. Better take an outsourcing partner on board, and have accurate general ledgers so you can have your financial information on your finger tips and gear your company towards growth and profits at every opportunity.