Constructing the General Ledger for Your Small Business
The General Ledger is the Summary Financial Record for Your Business
The general ledger is the main accounting record for your business if you use double-entry bookkeeping. When you hear the phrase "keeping the books," it refers to maintaining the general ledger.
What Goes Into the General Ledge?
The general ledger is a complete record of all the financial transactions over the lifetime of your company. Think of the general ledger as a catch-all. It is used to prepare financial statements, research out-of-balance conditions and internal and external audits, and it includes accounts of assets, liabilities, owners' equity, revenues, and expenses.
The general ledger holds all of the financial information you will use to create your income statement and balance sheet reports, and it serves several main purposes in the financial operation of your business.
Don't confuse the general ledger with the general journal which is a chronological record of transactions. The general ledger is organized by account, and, when posted in the formal records of the company, may display the account balance after each posting.
Use Chart of Accounts for Your Business
The general ledger accounts are built based on the Chart of Accounts for your small business which shows the main accounts that will be shown in your financial statements. The Chart of Accounts can literally consist of hundreds of accounts depending on the size and complexity of your business. Included are such accounts as each current asset, the fixed assets, each current liability, the long-term liabilities, the owner's equity accounts, sales revenue, each expense account, gains, and losses.
The general ledger is built by transferring journal entries of a company's financial transactions from its accounting journals to the general ledger. Each financial transaction has a source document, such as an invoice or canceled check, and a journal entry. The journal entry may be in the general journal or it may be in any number of special journals.
How Journal Entries Work
Traditionally, businesses enter much of their financial transaction data into accounting journals on a daily basis. When a financial transaction occurs and a source document is generated, the transaction is entered into the general journal. The general journal lists transactions in chronological order. The date, amount, accounts affected, and the direction in which the accounts are affected are noted. When you note the transaction, you have to make sure the debits and credits remain in balance.
Your company may also have a wide range of special journals. Some of the more common special journals are the sales journal, the cash receipts journals, and the cash disbursements journal. The number and types of special journals companies keep is a personal decision. For example, if your company uses a computerized accounting system, the different special journals will be generated as you enter your financial transactions into the computer.
A Final Word About General Ledger Entries
Once financial transaction entries are made in the appropriate journals, they are summarized and entered in the general ledger. This should happen once a month and there should be a separate page for each account.
The detail of your company's financial transactions is now stored in the journals. The general ledger shows all the summary information for financial transactions for your company from the general journal and the special journals.