Accounting ledgers are an essential aspect of small business bookkeeping. As a small business owner, you need to be aware of all the transactions your business has completed in an accounting period. That’s where the general ledger comes into play.
Financial statements like the income statement , balance sheet , and cash flow statement show the financial health of a business. Business owners can generate all three statements using the accounting cycle, which includes the general ledger .
In this article you will learn:
The accounting cycle has four steps:
Transactions come from source documents like receipts and invoices . Each accounting document is used to post a journal entry.
A journal entry includes an account number, a date, a dollar amount, and a description of the entry. In some cases, accountants post information to control accounts and then transfer the data into a journal entry.
The journal entries post to the general ledger. While some small businesses use Excel, accounting software — especially cloud-based software — is a more efficient way to maintain general ledger accounting records.
To produce the financial statements, an accountant generates a trial balance that lists each account and the current balance. You can use an adjusted trial balance to generate financial reports .
In financial accounting, a company’s main accounting record is its general ledger. Although there are tools that automatically categorise these transactions, such as bank integrations , it’s still important to know the basic components of general ledger accounts. Knowing the components means you can spot potential issues in your financial data.
An accounting ledger is part of the bookkeeping system where a business records all its financial transactions. A business will create separate categories for such transactions - these are known as accounts. All account records of a company will be listed and contained within the general ledger, or principal book of accounts.
A general ledger has four primary components: a journal entry, a description, debit and credit columns, and a balance.
You can use the account balances in the general ledger to generate the trial balance. A trial balance lists every account and the current account balance. The dollar amount of total debits must equal total credits in the double-entry accounting system.
The general ledger must include all accounts of a business that will appear on their financial statements at the end of an accounting period. These are known as general ledger accounts (GL accounts). The five key GL account types are as follows:
All financial transactions of a company must be accounted for. The GL accounts will act as a list of all transactions involving that specific account. These entries will correspond with the company’s journal entries– which record all increases and decreases to accounts.
Every accounting period, these entries and account listings are compiled into the essential financial statements of a business, including the balance sheet and income statement. It is these documents that reflect the overall financial position of a company . Such information is used internally and externally to measure the success of a business and ensure that all dealings meet governing body regulations.
As the general ledger contains all accounts associated with the business, these accounts are sometimes so large that they need to be broken down into further detail. This is where subsidiary ledgers come into play. A separate subsidiary ledger is created for the recording of these lower-level accounts.
A general ledger account that holds all subsidiary ledger accounts is known as a control account.
