Accounting / Bookkeeping Basics: Understanding The Ledger

General Ledger
In the early days, accountants and bookkeepers reported financial transactions manually, helped by a double-entry bookkeeping system. However, with the invention of computers, it became easier to monitor transactions at a glance. You no longer have to report in books; you can use advanced accounting tools and Excel sheets. Although both small and large businesses record transactions have evolved, the Ledger remains relevant. It is a vital accounting record for the production of financial results, which are critical to evaluating your business finances.
 

Types of Ledgers
- Purchase Ledger: A Purchase Ledger is a ledger where the business organizes the purchases of goods and services from other businesses. It provides visibility on the amount charged by the supplier.
- Sales Ledger: A Sales Ledger is a ledger where the company tracks the sales of the items, supplies, or costs of the goods delivered to the buyers. The Sales Ledger indicates sales revenue alongside the income statement.
- General Ledger: A General Ledger is categorized into two types, namely a private Ledger and a Nominal Ledger. Nominal Ledgers contain information on costs, sales, depreciation, insurance, and much more. Private Ledgers, on the other hand, offer private records such as salaries, wages, capital, etc. Just like the name implies, a Private Ledger is not always accessible to just anyone.

General Ledger – Your Business Master Book!
A general ledger is an accounting book that includes a comprehensive list of a business's financial dealings. This makes a quick peep into your business finances simple. It includes accounts like liabilities, fixed and current assets, income, investments, profits, and losses. This accounts book is perhaps the most valuable book for any company, so it is also known as the book of final entry.
Although the General Ledger is not the only resource you need when making business decisions, it will provide you with the information you need to analyze the business's financial results over the next month or the entire financial year. The General Ledger is an easy place to locate transactions that impact cash, inventory, Accounts Receivable, and any other account listed in the Chart of Accounts of your company.

A General Ledger is broken down into five different categories, known as accounts. They include the following:
⮚ Assets: Assets are those resources owned by the organization which add value to the business. These may include cash, stock, accounts receivable, equipment, trademarks, and patents.
⮚ Liabilities: Liabilities are existing or potential financial obligations which the company must pay. Current liabilities can include wages and taxes for workers, and non-current liabilities can also include items like bank loans or credit lines, as well as mortgages or rentals.
⮚ Equity: Equity is simply defined as the difference between the value of a company’s assets and its corporate liabilities. If a company seems to have more liabilities than its assets, it may have negative equity. Equity may include common shares, stock options, or stocks, which is strictly based on whether the owners and investors publicly or privately own the company.
⮚ Revenue: Revenue is the company income that is generated from the sales of its goods and/or services. Revenue may include profits, royalties, dividends, or any other payments that the company receives from other companies or individuals.
⮚ Expenses: Expenses consist of the money paid out by the company in exchange for goods or services. This can include rent, electricity, transportation, etc.
Generally, General Ledger will include a front page listing the names of the accounts described within, and this list is regarded as the "Chart of Accounts." However, the accounts documented within the General Ledger is known as the Accounts ledger.

Creating Entries for the Ledger
Since your business accounts are first reported in journals, you are expected to create several General Ledger entries which are generally dependent on the details pulled from the corresponding journal.
First, you report transactions in a journal, also called the book of original entry. Every line in this book is known as a journal entry. Entries may include items like dates, descriptions, and quantity of a product that has been purchased or sold. To stay organized, the journals are split into several accounts. You'll have five main accounts: assets, liabilities, equity, revenue, and expenses. These accounts can be further divided into smaller subcategories. For example, you can divide the assets into categories of inventories and receivables.
If you're using a double-entry bookkeeping system, you'll need to include a debit or credit. Debits and credits are entries that are similar but opposite. In essence, debits and credit account ultimately balance each other out. A double-entry bookkeeping system guarantees that the general directory of a business is always in balance. Each entry of a financial transaction in a ledger account debits that same account and credits the same amount elsewhere. For instance, if $2,000 were credited to the Assets Account Ledger, it would have to be debited in another account Ledger to reflect the transaction.
Debits and credits differently affect the accounts. Most accounts increase with debits, whereas others increase with credits. Let's see how debits and credits impact accounts, using the following bullet points:
- Revenue: Increased by credits and decreased by debits
- Assets: Increased by debits and decreased by credits
- Expenses: Increased by debits and decreased by credits
- Equity: Increased by credit and decreased by debits
- Liabilities: Increased by credit and decreased by debit.

After you have recorded the transactions in the journal, you can transfer them to General Ledger. You are expected to record every transaction in General Ledger, and, of course, these transactions are usually taken from the journal. When posting to General Ledger, provide the transaction sum and references to where the entries were initially entered in the books. This makes it easy for you to trace a transaction whenever a query arises. There will be times when you might wonder what a figure indicates. If you are a bookkeeper working for other businesses, your superiors or the business owner might question why some money was spent, or an auditor (an external accountant that checks for accuracy) could raise a query.
Regardless of the reason that someone doubts the entry to General Ledger, you certainly want to be able to locate the point of the original entry for each of these transactions in each account. This is where the reference information plays a vital role. It provides a quick direction as to where the initial transaction details can be found in the journals; this helps to answer any issue that may arise.
The General Ledger is a document of final entry. If you find it difficult to balance your accounts and estimate the gross values manually, you can do this in a jiffy by using basic accounting software which will automatically calculate the figures.
You can record your journal entries in a spreadsheet without having to employ bookkeeping and accounting tools. Even so, this approach may be time-consuming and may lead to further errors when posting to the Ledger.
As a small business owner, you are expected to update your General Ledger whenever you make transactions. Move journal entries to the Ledger at the end of each month. This document helps to organize the very same details in the journal, but this time, it is structured in a different format.

Why Ledger Entries are Relevant
It's really up to you (and, of course, your financial advisor) to determine what's best for your small company. You could be doing great without a general ledger, and for obvious reasons, you wouldn't want to spend unnecessarily! But if you're curious to know, there are several compelling reasons why you might want to consider using a general ledger for your small business.
Without a general ledger, you only have a list of unorganized transactions. Finding individual entries is challenging at times. Posting in the Ledger allows you to organize transactions, and general ledgers present a broad picture of your financial performance and evaluate your revenue and expenses.
Posting in a ledger makes it much easier to spot inconsistencies in the financial reports. Spotting these errors right on time is critical for accurate financial reporting and tax filings. In the case of an audit, learning to make up-to-date ledger entries will help you prevent unnecessary charges.

The General Ledger is your master document for basically all financial transactions in your company.
You also need to grasp the basic concepts of double-entry accounting, the basic accounting equation, and how to move journal entries to the Ledger. When you understand and start using a general ledger, you will know how effective it is. It offers several powerful features. The most important, of course, is that it is the foundation for creating the financial statements critical to assessing your financial performance.

Consequently, given the importance of a general ledger, we would suggest using an accounting software platform to integrate your accounts, document your transactions, and manage your records. With the help of accounting software, you will minimize the risk of a manual error, create your general ledger instantly, and be able to develop additional reports that can be used for financial analysis. Also, accounting software will most certainly offer the ability to provide direct exposure to your accountant or business accountant so that they can help you track your financial activities within the system.
However, if you decide to keep your records manually, you may have to consider reviewing them regularly to ensure that all transactions reported are valid, up-to-date, and accurate.