ledger is the core of your companys financial records. These
constitute the central core of your system, and every transaction
flows through the general ledger. These records remain as a permanent
track of the history of all financial transactions since day one of
the life of your company.
and the General Ledger
Your accounting system
will have a number of subsidiary ledgers (called subledgers) for items
such as cash, accounts receivable, and accounts payable. All the entries
that are posted to these subledgers will transact through the general
When a credit sale posted
in the account receivable subledger turns into cash due to a payment,
the transaction will be posted to the general ledger and the two
(cash and accounts receivable) subledgers as well.
There are times when items
will go directly to the general ledger without any subledger posting.
These are primarily capital financial transactions that have no operational
subledgers. These may include items such as capital contributions,
loan proceeds, loan repayments (principal), and proceeds from sale
of assets. These items will be linked to your balance sheet but not
to your profit and loss statement.
What a General Ledger is Used For
There are two main issues
to understand when setting up the general ledger. One is their linkage
to your financial reports, and the other is the establishment of opening
The two primary financial
documents of any company are their balance sheet and the profit and
loss statement, and both of these are drawn directly from the companys
general ledger. The chart of accounts determines the order of how
the numerical balances appear, but all entries that are entered will
appear. The general ledger accrues the balances that make up the line
items on these reports, and the changes are reflected in the profit
and loss statement as well.
The opening balances that
are established on your general ledgers may not always be zero as
you might assume. On the asset side, you will have all tangible assets
(the value of all machinery, equipment, and inventory) that is available
as well as any cash that has been invested as working capital. On
the liability side, you will have any bank (or stockholder) loans
that were used, as well as trade credit or lease payments that you
may have secured in order to start the company. You will also increase
your stockholder equity in the amount you have invested, but not loaned
to, the business.
The General Ledger Creates an Audit Trail
Dont let the word
audit scare you; we are not talking about a tax audit. Although, if
you are called to respond to an outside audit for any reason, a well-maintained
general ledger is essential.
But you will also want
an internal trail of transaction so that you can trace any discrepancy
(such as double billing or an unrecorded payment) through your own
system. You must be able to find the origin of any transaction in
order to verify its accuracy, and the general ledger is where you
will do this.
Use the chart below to
follow the transaction flow of the General Ledger: