For business owners to succeed in running their businesses, they not only need to market their products and services but also maintain a healthy cash flow. To do so, they need to establish their bookkeeping and accounting systems.
Record-keeping and accounting processes enable businesses to monitors their financial well-being. These administrative tasks help them monitor their expenses to produce their products and offer their services, and the revenues they received from selling these commodities as well. In addition, these allow them to manage their funds appropriately and continue with their business operations.
Although recording business transactions is generally a straightforward process, there is actually a lot to understand with the bookkeeping and accounting processes. Business owners need to know the proper way of keeping transaction records to maintain accurate accounting records and fully manage your enterprise’s financial health.
For businesses to maintain organized and accurate financial records, they need to log their transactions on several books of accounts, including the general ledger.
What Is a General Ledger?
A general ledger is a master record used to sort, store, and summarize all financial transactions incurred by a business right from the beginning of its operation. Therefore, every money that comes in and out of the business is recorded here.
Due to this, the ledger is the main accounting record a company uses to gather transaction data needed to produce trial balances, balance sheets, financial statements, cash flow statements, and other accounting reports.
Difference Between a General Ledger and other Financial Accounting Documents
With the different financial accounting documents produced by a business to keep track of their financial well-being, it can be easy to confuse one record with another. For this instance, the general ledger is interchanged with the general journal, trial balance, and even balance sheet. Here are the key differences between the general ledger and the three other accounting documents.
The general ledger provides all of the financial records for the entirety of the business; hence, transactions done even at the beginning of the business are recorded here. Meanwhile:
A general journal is an accounting document where business transactions are listed according to the date. This is where transaction data are first recorded before being posted in the correct book of accounts. In addition, the difference between a general journal and a general ledger is that information on journal entries is summarized in the journal. In contrast, in the ledger, every financial data has detailed information about them.
A trial balance is an accounting report that contains the ending balance in each book of accounts in the general ledger. This lists the totals of all debits and credits, ensuring that every account in the general ledger is balanced.
The balance sheet shows only the financial data for a specific period, enabling the company to get a financial picture at a certain moment.
Books of Accounts included in the General Ledger
There are five common accounts used to sort and store financial transactions in the general ledger:
The asset book of account, also known as asset ledger, is the subsidiary ledger in the company’s general ledger that affects asset accounts from all journal entries. Assets are resources that the business own and produce value, including cash, inventory, equipment, property, patents, and even trademarks.
The asset ledger separates current assets from long-term assets; hence, it can be extensive, depending on how large the company is.
The liability account is the subsidiary ledger that records journal entries that the business owes to a third party. In this ledger, liabilities are broken down into current liabilities or non-current liabilities.
Current liabilities are account payables that need to be paid quickly or within one year; they can include wages payable, taxes, customer deposits, and customer repayments. On the other hand, non-current liabilities are long-term account payables that are to be paid in more than 12 months; these can be bank loans, credit lines, bonds, mortgages, or leases.
The equity account in the general ledger is made up of the owner’s capital contributions and the accrued earnings that have not been distributed to the owner(s). It also reflects the withdrawals made by the business owner(s).
The equity ledger also details how much a business is worth after its liabilities are subtracted from its assets. Thus, if the enterprise has more assets than liabilities, it can have positive equity. Consequently, if it has more liabilities than assets, it can have negative equity.
The revenue or income account in the general ledger represents the business’s earnings. It records the sales incurred from its products or services, interest income, royalties, and other fees that it collects from its customers or other businesses.
The expense account is a subsidiary ledger in the general ledger that records the costs a business incurred to generate revenues. In the expense account, expenses are separated into two categories: operating expenses and non-operating expenses.
Operating expenses are costs incurred to generate operating revenues, such as rent, wages, utilities, and marketing and advertising. In contrast, non-operating expenses are costs that cannot be linked back to operating income, such as interest expense.
General Ledger and Double-Entry Bookkeeping Method
The general ledger and double-entry bookkeeping method come hand in hand for recording business transactions and monitoring the company’s financial well-being.
Double-entry bookkeeping is a system in which financial data is entered twice: as a debit and as a credit. This helps ensure that all transactions are properly recorded, enabling the business to reduce errors, easily determine outstanding balances of account receivables and payables, and prevent fraud.
Accordingly, through the general ledger, the business can quickly review the financial transactions it incurred during operations. This is because financial data are efficiently categorized as assets, liability, equity, revenue, and expense.
General Ledger and Accounting Software
Over the past decades, business owners and their bookkeepers manually kept the general ledger, logging and categorizing transactions by hand. However, the conventional process of updating transactions in the general ledger has become inconvenient and inefficient in this age of technology.
Businesses operating in this modern era need to replace their conventional systems with cloud accounting software programs to maintain their general ledger and other accounting records seamlessly and reduce errors on their transaction logs. In addition, with the help of an accounting software app, enterprises can efficiently categorize their transactions and automatically distribute them into the correct accounts in their general ledger.
Where to get easy-to-use and time-saving bookkeeping and accounting services?
KIPPIN offers accounting and bookkeeping services tailored to simplify the everyday tasks of businesses. We align our clients to top financial experts on our platform to take care of all your accounting and invoicing needs. We also provide software-only solutions to automate processes, making them quick, easy, and remotely accessible.