As your business grows, it is essential to have a sound bookkeeping system. Keeping accurate financial records is crucial for many things such as preparing taxes to assessing the health of your business. A general ledger is one of the first tools a maturing small business needs to establish because 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 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 subledger, 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
A general ledger isn’t just more paperwork. It gives you full insight into your company’s financial health, financial strengths, and weaknesses. Some of these may include:
· Seasonal changes in revenue, indicating a need for new cash management strategies
· Increases in debt that may slow business growth
· Profit growth, signaling an opportunity for reinvestment in the business
· New or increased expenses that may affect overall business costs and profitability
In fact, there are many reasons why the general ledger matters:
- 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
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
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 software, manually, or by outsourcing the work to a bookkeeping services company. It is smart to:
1. Ensure all transactions are entered in the appropriate journals
2. Summarize transactions and add them to the general ledger at least once a month
3. Give each account a separate page, if you’re entering transactions manually to avoid confusion and give you ample space to record transactions
Limitless Investment and Capital Bookkeeping Services in Chicago and Tampa.
Limitless Investment and Capital small business bookkeeping services in Chicago and Tampa can help you harness the power of your company’s financials. From helping you prepare accurate financial statements to managing 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!