Your general ledger provides valuable insights to help you get to know your business better. It’s like the forensics of how your business is doing, and it’s there to help you.
A general ledger is an accounting record that’s instrumental in evaluating your business’ overall financial health. It organizes all of the financial transactions made over your company’s lifetime into trackable categories. While allowing you to keep a consolidated, thorough record of your finances. The general ledger provides a clear foundation to prepare key financial statements. Including your balance sheet, income statement and other reports.
Creating and understanding your general ledger can take some time. It may require you to navigate a bit of a learning curve. However, the insights you’ll unlock are well worth the effort.
Why Use a General Ledger?
Keeping an accurate general ledger ensures that all of your financial information is up-to-date. Leading to greater efficiency in handling a variety of otherwise time-consuming financial tasks. Being able to quickly parse and identify information provides numerous advantages:
- Immediately detect and stop unusual or fraudulent transactions, and fix discrepancies.
- Solve out-of-balance statements. Use bank statements in tandem to validate data.
- Stay on top of spending.
- Take greater control of internal and external audits and tax filing.
- Apply for loans or secure other capital more efficiently.
How to Make a General Ledger
A general ledger is broadly structured into two sections: Balance Sheet and Income Statement. These are categorized further into five main accounts or categories. Assets, liabilities and owner’s equity are covered on the Balance Sheet. Meanwhile, income and expenses are recorded in the Income Statement.
Each primary account contains subledgers specific to that particular account. For example, fixed assets and cash are subledgers within assets. While loans and credit card debt are subledgers within liabilities. You’ll need to identify all that apply to your business. Online templates and general ledger guides can help you get started.
1. Balance Sheet
The Balance Sheet consists of three main categories: assets, liabilities, and owner’s equity.
A resource owned by your company used to bring positive economic value is an asset. An asset may be either tangible or intangible, current or long-term. Some examples include cash, supplies, patents and equipment. An increase in this numeric value means value is coming into the company. As a result, increasing the value of the business.
Accounts receivable (AR) is one of the most common subledgers of a company’s general ledger. It records money owed to you. This is when your goods or services have been delivered or used, but your customers have not paid you yet. That balance is input within the AR subledger.
A liability refers to obligations to other parties that sacrifice future economic gains. This is not limited to paying back debt in cash. As it can include transferring your assets or providing your goods or services to resolve past transactions. An increase in this numeric value means value is going out of the company. As a result, decreasing the value retained within the business.
Within the liabilities account of your general ledger, accounts payable (AP) is a common subledger. It specifically records what you owe. For example, to your suppliers. Its balance reflects the bills you have received but not paid yet.
Equity is a broad reference to what you own. This subledger reflects the net value of all the assets that belong to you. Also includes any debts or other liabilities that detract from that amount.
For example, if you own a building worth $100,000 and owe $40,000 on the loan, the difference of $60,000 is your equity. Although you are the property owner, you only officially “own” 60% of its value. Equity can be a more nuanced category as it relates to an entire business entity.
Keeping track of this account will help you understand the real value of your business. Making it easier when it comes time to think about selling or offering equity to acquire funds for expansion
2. Income Statement
The Income Statement consists of two main accounts: income and expenses. The income statement keeps track of both revenues and expenses. You can monitor the performance and fitness of your company over select segments of time. Keeping an accurate general ledger is an excellent way to determine areas where your business is either over or under budget.
The income subledger records the amount of money earned by your business. Including the various accounts for categorizing how your company makes money.
Expenses are the cost of doing business — paying rent and employees, advertising and other variable spending. This subledger tracks these various expenses. Categorizing them in a way that makes the costs of running a business, or creating a product easy to understand.
How to Use a General Ledger
The accounting used in the general ledger is double-entry bookkeeping. Double-entry accounting means a debit entry to one account requires an opposite credit entry to another. Debits increase asset and expense accounts and decrease liabilities and owner’s equity accounts. A “credit” does the inverse.
As a result of every entry offsetting each other, this will always keep the basic accounting equation in balance. If at any point the total debits for all accounts does not equal the total credits, the equation will not balance. You’ll know you have an error to fix.
After you’ve gone through the initial work to set up a general ledger, you’ll still need to update it periodically. All small business owners should have a working knowledge of their general ledger. Similarly, it can be helpful to outsource day-to-day bookkeeping to a freelance accountant or bookkeeper. Depending on your unique needs and the requirements of your schedule.
FINSYNC’s services network matches small businesses with vetted financial professionals. Including accountants and bookkeepers, so busy owners and managers can stay focused on mission-critical tasks.