A well-prepared general ledger can give you important insights into the financial health of your small business. Read on for a primer on this key financial document and how it can impact your small business.
What’s a General Ledger?
Ever heard the phrase “keeping the books?” What this practice really refers to is keeping the general ledger up-to-date. The general ledger is a master record of all the financial transactions that occur over the course of a business’s operation.
Transactions in the ledger are organized by general ledger account type. These include accounts for business assets, liabilities, revenue, expenses and owner’s equity.
How Does a General Ledger Work?
As daily transactions occur in business, you can summarize and record them in a journal or daybook. At regular intervals, you would transfer these transactions into the corresponding general ledger account.
Let’s say you’re using the double-entry accounting method where each ledger entry is listed as a debit and credit in two separate columns. You or your accountant will prepare a report of all the debit and credit accounts and their balances. This is known as a trial balance.
When the total of the debit and credit accounts is equal, you have reconciled the general ledger, or “balanced the books.” If the account totals are not equal, you can look for the error in either the ledger or the journal where a transaction was originally recorded.
Preparing a general ledger used to be a painstaking process. But modern accounting software makes the task simple even for new small business owners who are inexperienced with accounting.
This sophisticated software allows you to enter each transaction only once even when using the double-entry accounting method. It can even tell you if you entered a transaction in the wrong general ledger account type.
Why Do You Need a General Ledger?
The account totals figured in the general ledger are not only useful for balancing the books. They are also used to prepare key financial statements, including the balance sheet and income statement.
This means that preparing a general ledger can also help you keep tabs on profits, losses and the overall financial health of your small business. The general ledger can be doubly useful at tax time in presenting an accurate and consolidated view of your revenues and expenses. Instead of hunting down receipts or old credit card statements, you can find a record of transactions almost instantly.
Having an up-to-date general ledger also means that you can spot unusual transactions before they pose a more serious problem. Small business owners may be looking at anywhere from a handful to hundreds or more transactions each day. Without a general ledger, for example, you might not notice that you were accidentally charged a small amount for an item you did not recognize.
The other key advantage of a general ledger is that it reports real revenue and expenses, rather than forecasted values. This means a general ledger is more useful than a budget alone in helping you keep costs under control.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.