A general ledger, which is simply a collection of your account charts, is a simple and effective way to view spending and to keep your business on track. The general ledger is used in conjunction with accounting journal entries. In most cases, the general ledger and the journal entries are done on a computer. There are many software programs available that will do most of the work for you, but it is important to know how to do this yourself in case the software crashes or there are power outages. In some cases, smaller businesses still do their general ledger by hand because they cannot afford the software or just don’t need it.
With software, you record a check that you wrote and in the background, the expense account is automatically debited and is then posted to your accounting ledger for you, saving you time. First, you must know how to decide whether the account should be credited or debited. This is done with accounting journal entries. You can get more information on journal entries with a variety of courses from Udemy, including Introductory Financial Accounting to get the basics or something more advanced like Advanced Finance and Accounting for Startups.
Most businesses use a double-entry accounting system, where every transaction is recorded in more than one account. The first account is the debit account, and the second will be the credit account. With the debit account, amounts are recorded on the left and with the credit account; amounts are recorded on the right. The debits and credits for both accounts must be equal to each other.
Create your journal entry by entering the title of the account that will be debited first, then the amount. Then enter the title of the account that will be credited below the debited list and to the right of the debit, followed by the credit amount. To determine whether it will be debit or credit, you will need to decide what sort of account will be affected and whether it was decreased or increased.
To do this, memorize the accounting equation: Assets = Liabilities + Owner’s Equity
Assets are on the left (debit) side and liabilities and owner’s equity are on the right (credit side). One example includes an asset account, such as Cash. It would normally be on the debit side because it is an asset, but you must first decide if you increased your cash. If you used cash to pay small business bills (such as stamps), then you would record it on the right side, because it decreased the amount.
Example of Accounting Journal Entry
If you open a new store, you would need to invest money in your business, rent a shop and sell the merchandise. In this case, you invested $15,000. Below is the first month of accounting journal entries, which began in March:
|You have deposited $15,000 into your business bank account.||Increase in your asset (cash)||Increase in owner’s (your) equity|
|You paid your first month’s rent||Expenses increased.||Assets decreased.|
|To make the items you are selling, you will purchase materials on credit.||Your assets increased (inventory)||Your liabilities increased (AP)|
|You received sales of $2200 total. Your cash sales were $1200 and sold $1000 on customer credit. This is considered a compound entry||Increase in assets (both cash and AR)||Increase in Revenue|
|5/15||Company Material Expense||600|
|You spent $600 of material to make more of your product.||Expenses increased (materials used)||Assets decreased (inventory)|
|You paid $1800 on your credit account||Liabilities decreased (AP)||Assets decreased (cash)|
|Customers paid $500 off their credit||Assets increased (cash)||Assets decreased (AR)|
Because the above was an example, there were no account numbers, though you would want to include these. Dollar signs ($) are only used in the above example when explaining the reason for the entry. Dollar signs are not used when recording amounts for those in the US because it is understood that all recording amounts are in the US Dollar.
Posting to the General Ledger
After the first month in the example above, you will want to take the accounting journal entries and transfer all the credits and debits from those entries to the correct accounts in the general accounting journal. This process is called posting. You will always have at least two accounts in your accounting ledger group, but most people have more than one, based on their chart of accounts.
For example, you would take all the cash accounts and post those to your Cash general accounting ledger.
For your Cash account in the ledger, it would look like this (using the above example):
|May 1||Balance forwarded from Apr. 30|
With the above account, you have a balance of $21,500 at the end of the month. To do this, you would subtract the credits and add all the debits.
In the first column is the date of the transaction. The second column is the description, and as you can see, it is not always necessary to use one, unless you want to for uniformity. The third and fourth columns are the debit and credit columns, and the last is the balance column. If you prefer to use a running total, this is where it would go. Otherwise, you can simply place the balance at the bottom, like the above example.
The first line of the above example is the balance that was carried from last month. This first line will always include the balance from the last month. The second line is the beginning amount you used to start your business. It is quite easy to record the entries, because you already know where everything is placed, as you created your journal entries as you went through the month. This is extremely helpful.
You may be wondering why you placed the balance in the debit column. Each account type has a normal balance depending on the category. Liabilities, owner’s equity and incomes will always have a credit balance while assets and expenses have a debit balance.
An example of liabilities, using the above journal entries, would look like this:
|May 1||Balance forwarded from Apr. 30|
Because there weren’t many liabilities, there are only two entries. However, you may have more accounts payable entries and all of these would be entered into the correct spaces.
From the journal entry examples above, we know that, on March 10, you purchased materials on credit and on May 28, you paid $2000 on that credit account, causing less liability. Because liabilities are always credits, you started the balance in the credit column and entered the ending balance there, as well. After subtracting the credit and adding the debit, you end with a balance of $16,000.
If you don’t want to use software, you will probably want to create these accounts and your general accounting ledger in a Microsoft Excel workbook.
Taking the cash and liabilities examples, you would name one Excel spreadsheet “Cash” and one “Liabilities”. Then you would enter the five column headings and enter the information. It is the same concept as using a table in Microsoft Word, but it will keep all of the accounts in the same area. You simply click the tab at the bottom to switch spreadsheets. This is helpful when you have many account charts.
Why a General Ledger is Needed
The example above was only one month of journal entries and a few of the account charts, so it may not seem all that important. However, a general ledger is actually the complete record of all financial transactions for the life of the company. Because of this, it is also known as a running ledger, because you will be entering journal entries every day that business is conducted and will be filling out the ledger every month.
The general ledger will be used to prepare finance statements and can help find errors quickly. Numbers can be tricky; it is extremely easy to transpose a number. When typing a letter, you can use a grammar check and the spelling check that is included with the word processing software, but the computer program doesn’t know if your numbers are correct. You may write a check for $1545, but may record it in your records as $1554. This can be problematic because you think you have more money than you really do. Later, when financial statements are created, you can go back to the journal entry and ledger to find out where the mistake was made and fix it, so everything balances according to your bank records and your records.
A general ledger can also help in case of fraud; you will have everything down on paper with paper trails to help local authorities, and your bank find the culprit and restore your reputation.
You can get more experience and knowledge with online courses from Udemy that offer introductions to accounting and the general ledger. Check out all Udemy has to offer for managerial courses today.