A General Ledger (GL) contains every financial transaction recorded during any accounting period (or cycle). Nowadays, businesses record their account data electronically on software such as QuickBooks. But, before records were stored electronically, businesses hand-wrote all their transactions in “books” for each account. All these books combined were called General Ledger (GL). General Ledgers use the double-entry system of accounting. This means that every transaction will be recorded on two different accounts. After a General Ledger is complete, it is used to create financial statements.
Today’s Technology
Fortunately, accounting-based software exists today. This means that business owners, accountants, or bookkeepers can spend less time manually inputting financial transactions, spend more time growing their business, and analyze that data to make critical financial decisions. Many affordable accounting software options are on the market today, such as QuickBooks. We recommend taking the time to research the features offered throughout the software that best fits your company’s needs. There is no need to buy the costliest software with a multitude of features that do not apply to your company. Lastly, we recommend having an accountant familiar with that software set it up for you. Improper setup can cause hours of pressing the ‘delete’ button.
Preparing for a General Ledger
Before anything is posted in General Ledger, it is first recorded in journals, also known as the “Books of Original Entry.” Nothing is posted in the GL before being recorded in its original journal. Every financial account has an assigned journal to it, and every time you record a transaction, it is called making a “journal entry.” Generally speaking, this is where a bookkeeper comes in handy. Although this job may sound monotonous, it is imperative. Depending on the size of your company, you may have a team of bookkeepers inputting daily transactions or a sole bookkeeper.
Double Entry System of Accounting
Every time a transaction is recorded, it will be recorded twice in two separate accounts. It will be debited to one account and credited to another. Every account will have two columns: Credits to the left and debits to the right. Depending on the nature of the account, they will either increase or decrease. There are five types of main accounts: Assets, Liabilities, Income, Expenses, and Equity. Remember, for every transaction you record (whether that may be a sale or purchase), it’s going to be recorded in at least 2 of those main five accounts. For example, Say you own a convenience store and are out of beer. If you buy $1,000 worth of beer wholesale from the factory- your cash account will decrease by $1,000. This is shown by crediting the account on the right-hand side for that amount. Now, you have $1,000 worth of beer to sell, so your asset account will be debited on the left-hand side for that amount. Now, the books are balanced. If the books come out with a number other than 0 by the end of a cycle, an error was made during a journal entry.
Trial Balance
It’s the end of the accounting cycle, and you are ready to create your financial statements. More times than not, some errors were generated during journal entries. This is the purpose of a trial balance. The word “trial” is what it sounds like. It lists all the accounts with the balances next to them. This is where you can see if any mistakes were produced when debiting and crediting accounts using the Double Entry System of Accounting. Remember, the balance must be zero, or an error has been created. You are one step closer to producing exact financial statements by completing a trial balance. The larger your company grows, and depending on the nature of your sales (a house cleaning company vs. a supermarket), your accounts will differ. The house cleaning company, which offers a single service, will have a much less complicated GL compared to the chain supermarket with hundreds of vendors and employees. Be prepared for when your company grows!
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