As your business grows, it is essential to have a sound small business bookkeeping system. Keeping accurate financial records is crucial for many things such as preparing taxes for assessing the health of your business. A general ledger is one of the first tools a maturing small business needs to establish because of all of your company’s financial reports, including its balance sheet, are prepared using information in the ledger.
What is a General Ledger
In the past, the general ledger was a large book where information was recorded by hand. It’s still possible to do your small business bookkeeping with a paper ledger, however, bookkeeping by hand takes 1,000 times longer resulting in most business owners and bookkeepers to handle general ledger tasks on their computers.
A general ledger is a master document of all the accounts your company has—it’s the complete record of financial transactions over the life of your business. It details changes to the company’s assets, liabilities, equity accounts, and other financials, unlike the general journal which simply lists transactions chronologically. When there are increases or decreases in any of these accounts, it should be listed here. These entries can also reclassify amounts, correct accounting errors, and close accounts at the end of fiscal years.
The general ledger is composed of many smaller ledgers or sub-ledgers of the money your business earns and spends. Depending on the type of sub ledger, it might contain information about transaction dates, descriptions, and amounts billed, paid, or received. As part of year-end tests, auditors may trace transactions from a subledger to the general ledger and from there to the financial statements, to ensure that transactions are being recorded properly in the accounting system.
Here are some examples of common sub-ledgers:
- Accounts receivable: money owed to your business
- Accounts payable: money your business owes
- Cash: liquid assets your company owns
- Inventory: sales or purchases affecting your inventory
The sub-ledgers your company uses will depend on the type of business you run. Hiring a professional bookkeeping service who understands your industry may be beneficial in setting up your books using sub-ledgers that make sense for you.
Why do you need a general ledger
The general ledger provides necessary information to create common financial statements. Statements may include your balance sheet, cash flow statement, and income statement. Reviewing your accounting statements may give you a clearer picture of your business’s health.
If you apply for a loan, the bank may ask to see your financial statements. You will need to use your general ledger to prepare statements. The general ledger can also be beneficial in the event of an audit. You will need to produce account balances if you are audited. An unbalanced general ledger may raise a red flag with the auditor.
You need a general ledger to organize your business’s transactions. It breaks down your financial activity into records that are readable. A general ledger will be valuable to you more than once such as the following:
1. It is how you get financial statements
Financial statements are absolutely crucial to your small business, and help you track your business’s financial position and performance, results of operations, and cash flow.
One of the best benefits of a well-built general ledger system is the ability to pull all kinds of reports. You can see your profit and loss for this year compared to last year, or this quarter compared to the same quarter last year. You can see how much your expenses have changed in every account from one period to the next.
2. You need it to file your taxes
You (or your accountant) need to refer to the general ledger in order to file your taxes.
This detailed report means you can see every single transaction that went into every account. With a view of all entries, it’s easy to spot payments or deposits that don’t belong in a particular account. This helps your tax professional clean up your books before preparing your tax return.
For instance, if you’re filing a Form 1099 for a contractor, you need to know how much you paid them during the financial year.
3. It gives you one place to view all your transactions
The general ledger allows you to see every journal entry ever made, rather than having to sort back through all your invoices, bank statements, and credit statements.
Creating a general ledger
You can create a general ledger on paper, a spreadsheet, or a software program. You record each general ledger entry with a date, account name, description, and balance. The size of your general ledger will depend on the size of your business.
The general ledger is based on the company’s main accounts associated with the business, including:
- Current assets
- Fixed assets
- Current liabilities
- Long-term liabilities
- Owner equity accounts
- Sales revenue
- Expense accounts
- Gains and losses
Keep it organized
Once you have created the ledger keep it updated regularly to ensure it is valuable to your business. You can create one using the software, manually, or by outsourcing the work to a bookkeeping services company. It is smart to:
- Ensure all transactions are entered in the appropriate journals
- Summarize transactions and add them to the general ledger at least once a month
- Give each account a separate page, if you’re entering transactions manually to avoid confusion and give you ample space to record transactions
The general ledger is your go-to source for your accounting records. You can organize all your transactions into separate accounts with a general ledger. By breaking your finances down into manageable pieces, you can accurately track your business’s health. To get started, you need to understand the accounts you record in the general ledger. Small business bookkeeping services in Phoenix can help you create and maintain your general ledger accounts.
Limitless Investment and Capital Bookkeeping Services in Phoenix and Denver.
Limitless Investment and Capital small business bookkeeping services in Phoenix and Denver can help you harness the power of your company’s financials. From helping you prepare accurate financial statements to manage bill payments to systemizing payroll and more, our team of expert local bookkeepers and accountants can help you put more time into what’s important: focusing on your business. To learn more, get in touch today!