What makes up a general ledger

Rephrased: Every debit on one account has a credit on another. You find debits on the left and credit on the right.

If ledgers are the master document for looking at the bigger picture, journals are the documents for analyzing the finer details of your business. While there are 7 types of journals , the four most common ones are the sales journal, purchase journal, cash receipts journal, and cash payment journal:.

The purpose of double-entry accounting is to make sure basic accounting equation balances. If at any time the sum of debits for all accounts does not equal the sum of credits, the equation will not balance.

You may be doing just fine without a General Ledger, in which case you may not want to boil the ocean! It assists in more accurate financial reporting on revenue and expenditure, and it creates clarity around what items take up the biggest share of capital.

In short, this allows finance teams to make strategic decisions to improve operational efficiency and reduce costs. It also ensures a healthy cash flow position and leads to things like investor attraction.

For many smaller businesses, a general ledger costs more in time than it does in financial success, and many small business owners opt out of such scrutinized record keeping. Here are a few reasons why. The general ledger consolidates all income and expenses into one place, making it possible to perform tax calculations quickly and easily.

Of course, with the right accounting software, you can configure it to auto-generate tax reports for you, which not only saves you time, but also reduces human error and increases compliance.

When you document every financial transaction, you gain complete clarity over money in, and money out. This makes it easy to spot fraudulent purchases made on behalf of the organization, which helps prevent heavy financial losses before they happen, not after. For organizations with sensitive financial transactions, the ledger can paint an accurate picture of what is happening in those accounts without delving into their details. Quite simply, the general ledger serves as the basis for the income statement, cash flow statement, and the balance sheet, and shows key metrics like profitability, liquidity, and the overall financial health of a business.

Whether you use a paper or electronic version, no general ledger is complete without source documents, such as bills or canceled checks, to affirm its information. At Ignite Spot, our firm strives to oversee the accounting needs of businesses large and small.

Our services are reliably comprehensive. However, our approach is far from one-size-fits-all. From explaining the function and use of the general ledger to offering advice on accounting software, we aim to give all of our clients the highly specific attention they require.

To find out more about using a general ledger and all aspects of accounting that we cover, visit these links:. Understanding the Accrual Accounting Method. What Does Equity Mean? How to Write Off Bad Debt. What is a Trial Balance? How to Reconcile Accounts. What is a Credit Memo? Thus, such a record helps you in tracking various transactions related to specific account heads.

Further, it also helps in speeding up the process of preparing books of accounts. This is because the detailed accounts in General Ledger help you in preparing the trial balance.

Further, the Trial Balance ensures that the information contained in your Ledger Accounts is accurate. Therefore, you can further use the accurate amounts showcased in your Trial Balance to prepare the financial statements. These statements include the income statement and the balance sheet.

So, preparing such financial statements becomes challenging if you do not prepare General Ledger. Furthermore, at the end of the accounting period, you close these Ledger Accounts. You do this as a result of balancing the debit and the credit sides of such accounts. For example, the outstanding payments against suppliers, payments to be collected from customers, etc.

You may choose to conduct an internal audit or get your accounts audited by an accounting professional. Therefore, General Ledger acts as an important financial record that is audited whatever may be the case. This is because General Ledger Accounts records transactions under various account heads. Further, it provides detailed information with regards to such accounts.

Thus, it may help you to undertake the audit smoothly. This is because you can easily verify if various accounting items are classified and recorded accurately with the help of the given information. Furthermore, General Ledger Accounting also helps you to spot material misstatements with regard to various accounts.

Also, the accounting professional auditing your company accounts may ask for sales receipts, purchase invoices, etc. They may do so in order to check if proper amounts are charged. General Ledger Accounts help you to record details of transactions that your business undertakes over an accounting period. For example, your sales ledger contains information like tax information, invoice number, goods sold, date of sale, customer details, etc.

Likewise, the revenue and expense accounts give an accurate view of the incomes earned or the expenses incurred. Thus, these details come in handy as you do not have to look for invoices or bank statements at the time of filing tax returns. This is because the details recorded in your ledger accounts provide sufficient details to file your tax returns. A number of transactions happen during an accounting period. Thus, it becomes difficult for you to find unwanted transactions if you do not categorize the transactions in General Ledger.

Further, this could become a cause of concern for you as a business entity. Say, for instance, you were overcharged for an item you purchased.

Now, it becomes challenging for you to identify this transaction if the Ledger Accounts are not prepared. This is because there are a number of transactions that occur during an accounting period. General Ledger Accounts are the basis on which you prepare Trial Balance. From Trial Balance, you are able to prepare statements of final accounts. These include the income statement and balance sheet.

Such financial statements help you in knowing the profitability and overall financial position of your business. A Control Account is nothing but a General Ledger Account where you record only the summarized information regarding a specific account. It does not contain detailed information related to such an account. Thus, you need to refer to a related subsidiary ledger to know the details of such a control account.

Here, a Subsidiary Ledger is a ledger recording detailed information of the related Control Account. Thus, you simply record a summary of various balances in accounts receivable when you use it as a Control Account. These include a summary of:. Accordingly, you do not record details of each sales transaction undertaken with various customers in the Accounts Receivable Control Account.

But, you can refer to the related subsidiary account if you need to check any detail regarding the sales made to a specific customer. Assets are nothing but the resources your business entity owns. These resources have the capacity to generate cash flows. Thus, assets are items of economic value that can be converted into cash or cash equivalents. Furthermore, the assets are categorized into current assets and fixed assets.

Thus, the asset account includes the following list of items.