Accounting Equation

This article is to inform and acknowledge the importance of General Ledger for small businesses. Before stepping into, let’s get our grip on this key concept of accounting, which is General Ledger. Any company’s financial information will be stored in the general ledger if the company is ensured in having it. So every day, a company conducts several transactions and the double-entry method of bookkeeping results in two entries for each transaction. Following that, these entries are filed in corresponding accounts known as ledgers. 

Now let’s delve into the backbone of accounting, that is General Ledger, in a detailed or comprehensive way.  Which will be a detailed description, then how it works, and its benefits, especially for small businesses.

General ledger

What is a General Ledger?

As the pivot of this write-up, the main focus is to inform and acknowledge about the relevance of General Ledger in accounting. When someone says they are “keeping the books,” they mean they are monitoring the general ledger. Why do you require a ledger? What exactly is it?

In order to organize and maintain the financial data required to create the company’s financial statements, accountants employ a general ledger as the system’s core component. The system for maintaining a company’s financial information is a general ledger, with debit and credit account entries checked by a trial balance.

It provides a record of every financial transaction that takes place during an operating company’s life and preserves the account information necessary to produce the company’s financial statements. And depending on the type of transaction, transaction data is separated into accounts for assets, liabilities, owners’ equity, income, and expenses. Accountants, business managers, analysts, investors, and other stakeholders utilize general ledgers to assess a company’s financial performance.

The general ledger is necessary for a company’s double-entry accounting system. A general ledger is used by companies that follow the double-entry accounting method, in which each financial transaction affects at least two sub-ledger accounts and each entry has at least one debit and one credit transaction.

Different types of ledgers 

Principally there are three different types of ledgers, these are-

  • Sales Ledger: In the sales ledger, the company records the sale of the goods, services, or cost of goods to clients. This ledger illustrates the concepts of sales revenue and an income statement. It is also known as a debtor’s ledger
  • Ledger of Purchases – A ledger of purchases is a record of transactions involving the purchase of products, services, or both from other businesses. The amount that the corporation paid to other businesses is made public.
  •  General ledger- Nominal ledger and private ledger are the two types of general ledgers. Data on expenses, income, depreciation, insurance and other items are included in the nominal ledger. Additionally, Private Ledger offers confidential data like capital, incomes, and earnings. The private ledger is only accessible to certain people.

How does a General Ledger work?

Bookkeepers develop a general ledger to compile and preserve the financial information required to produce the company’s financial statements. Exchanges are shown on distinct sub-ledger accounts that correspond to the business’s account structure. A trial balance, which acts as a statement of the balance of each ledger account, is produced by the accountant once the exchanges are finished or added to the general ledger.

Assets, liabilities, revenue, expenses, and owner’s equity are the several categories that a general ledger uses to organize transactional data. After each sub-ledger has been closed, the accountant prepares the trial balance. The information from the trial balance is used to produce the company’s balance sheet, income statement, statement of cash flows, and other financial reports. The trial balance is initially checked for flaws and updated by posting extra significant regions before the financial statements are created.

General Ledger account:

An essential component of a general ledger is a general ledger account.

A corporation keeps track of all transactions and financial data in its ledger account, which is a journal. Under the general ledger, the company’s general ledger account is set up, and the balance sheet is broken down into different accounts such as assets, accounts receivable and payable, stockholders, liabilities, and equity, as well as revenues, taxes, expenses, profit, and loss, as well as funds, loans, bonds, and stocks.

Businesses may employ a variety of ledger account types, including the following:

  • Assets (cash, accounts receivable, inventory, fixed assets, notes receivable)
  • Liabilities (accounts payable, accrued expenses, notes payable)
  • Equity (capital contributed by owners or members, distributions, common stock, paid-in capital, treasury stock, dividends, and retained earnings)
  • operating revenues (sales, service fees)
  • Operating expenses(wages and salaries, rent expense, depreciation, utilities, etc.)
  • Additional earnings and costs (investment income, gains and losses on disposal of assets, interest expense)

The transactions exist in connection to these accounting components. A few examples of the company’s assets are cash and accounts receivable. A unique GL account will be given to each asset on the ledger.

Benefits of a General Ledger

There are countless benefits or advantages in entailing a General Ledger for businesses. Let’s look at some of these –

  1. Produce trial balances-The primary benefit of ledgers is the ability to prepare trial balances, which is impossible without them. because a trial balance is created using the ledger account balance. Furthermore, it is impossible to be mathematically correct.
  2. Creating final positions—We are aware that the only way to create a final account is to use a trial balance (i.e., Trading Account, Profit and Loss Account and Balance Sheet). As a result, if the ledger account balance is not derived from a trial balance, it is challenging for us to design final accounts.
  3. Finding the Results of Each Account: Using the Ledger and the Double Entry Principles, one may find the Results of Each Account.
  4. Information gathering: A repository or warehouse for many transactions may be described as the ledger.
  5. Application of the Double Entry System: If we publish the journals to the different ledger accounts, the Double Entry System will be finished.
  6. Holding Secret Accounts Has Indirect Benefits The details of a classified account may be revealed after being accurately recorded in a ledger account.
  7. Display of Statistical Data: The ledger accounts and the balances associated with them are the sources of statistical data that management uses to make decisions.

General Ledger for small business: How is it functional?

As a business owner, you’ll need a system to ensure that you’re managing the financial data for your organisation properly. For many business owners, the general ledger serves as the framework of the system. A general ledger should be utilized as your primary accounting document because it provides an exhaustive record of your company’s financial activities. General ledgers are necessary for all business types and sizes, but their construction varies based on the situation, despite the fact that their fundamental concept is the same everywhere. A general ledger consists of accounts from balance sheets. The capital accounts, liabilities, and assets are made up of these. Accounts from the income statement are also included, such as those for revenues and expenses.

In order to create a general ledger, you must first identify each account. These include inventory, depreciation, owner’s equity, and payroll taxes. The subaccounts for the general ledger will then be developed from each of those accounts.

Once you’ve chosen which accounts to include in the general ledger, a trial balance needs to be created. In a document called the trial balance, all balances for general ledger accounts are listed. By doing this, you’ll be able to ensure that every transaction will debit one account and credit another.

When everything has been tallied up in the trial balance, the accounting equation, Assets = Liabilities + Shareholder’s Equity, must be correct. If the computation is illogical, you can be certain that one of your account records is inaccurate. This is because, as was previously mentioned, each debit on one account requires a corresponding credit on another account.

The main financial statements that keep track of every financial activity in your business are general ledgers. When it comes to accounting for finances and keeping track of every business transaction, the general ledger is unmatched.

In the past, double-entry accounting was used by accountants to manually enter financial transactions into the general ledger. Transaction recording got easier with the invention of computers. General ledger entries no longer had to be made in books; instead, you could utilize effective accounting software and Excel sheets. The general ledger’s significance has not changed despite changes in the manner transactions are recorded. It is a fundamental accounting document for generating financial reports, which are essential for assessing the health of the company. 

How financially sound your company will be can be predicted based on the general ledger. But your company can suffer if you make general ledger entries late. So if you are planning to start up a small business keep this in mind. And make out your plan brilliantly by being attentive to all these concepts which can ease your work.

I thus hope that this essay was useful in providing you with thorough information regarding General Ledger. Along with that, the many ledger kinds, their uses in the accounting field, the prerequisite knowledge, and finally how useful it is for small firms are discussed. The next article will explore and clarify a wider range of accounting-related facts. Keep in touch with us till then, and I hope everything is well and pleasant with you. Keep your outlook upbeat and rely on us for more details.

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