General Ledger Accounting: What Is It and How Does It Affect ...
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The general ledger is a master accounting document that offers a complete record of all financial transactions at an organization. This includes ... Thegeneralledgerhasbeenacornerstoneofgoodaccountingsincethedawnoftime.Priortodigitization,accountantswouldliterally‘keepthebooks’byhandwritingentriesintobigledgers,anditwashoworganizationsofallsizeskepttrackofeachandeverytransaction.Today,thegeneralledgerstillplaysabigpartinthefinancialprocess.Evenwithautomatedaccountingsoftware,accountantshavetotrackallfinancialrecordssothere’svisibilityovermoneycomingin,andmoneygoingout.Here’swhatyouneedtoknowaboutgeneralledgeraccounting,andhowitaffectsyourabilitytoreportthesuccessorfailureofyourorganization.Thegeneralledger:ashortintroductionThegeneralledgerisamasteraccountingdocumentthatoffersacompleterecordofallfinancialtransactionsatanorganization.Thisincludesalldebitandcredittransactions,likerevenue,expenses,assets,liabilities,andevenownershipequity.Thegeneralledgerisalsousedtogeneratekeyfinancialreportsforanorganization,includingabalancesheet,andaprofitandlossstatement.Withingeneralledgeraccounting,therearethreecoreconceptstoknow: Double-entryaccounting;Basicaccountingequation;andJournals.Here’sabriefoverviewofeachconcept.Thedouble-entrybookkeepingmethodInthisaccountingmethod,anentryonthedebitsidemustbeaccompaniedbyacorrespondingentryonthecreditside. Quitesimply,everyentryintoadebitaccountwillimpactthecreditaccount,andthismustthereforeberecorded,too.Forexample,whenanaccountantentersacreditentryintothecreditaccount,thisincreasesanowner’sequityandpositivelyimpactstheliabilitiesaccount.Asaconsequence,thedebitaccountwilldecreasebecausethereisnowmorecashinthebank. This‘balancingact’accountingmethodiscommonplaceamongfinanceteams,andmanyorganizationschoosetorecordtheirdebitsandcreditsusingthisapproach.Journalentries Priortorecordingsomethinginthegeneralledger,accountantsmustfirstenterrecordsintoledgers.Thesejournalentriesprovideanin-depthlookatspecificareasofaccounting,whilethegeneralledgerprovidesaholisticviewoffinancialperformance. Thereareseventypesofjournalstoknow.Theseare:Cashreceiptsjournal:thisshowsallcashinflowsCashpayment/disbursementjournal:thisshowsanycashflowingoutSalesjournal:thisshowsallsalesmadeoncreditPurchasejournal:thisshowsallcreditpurchasesmadebyabusinessPurchasereturnjournalSalesreturnjournalGeneraljournalThesesevenjournalsarethelifebloodofthefinanceteam,andthey’reusedalmosteverydaytorecordthevariousincomingsandoutgoings.BasicaccountingequationTheprimarybenefittodouble-entrybookkeepingistoensurethatthebasicaccountingequationbalances.Thisequationis:Assets=Owner’sEquity+LiabilitiesAtanytimeinanorganization’slifespan,thisequationshouldbalance.Ifitdoesn’t,then‘thebooks’areimbalancedandtheaccountantresponsiblewillhavetoprovideanexplanation. Toprovideanexample:ifyoupayanexpenseof$200,youenteradebitentryofthisamountintheexpensesideandcreditthecashside.Thismusthappeninboththejournalandthegeneralledger.Bonus!TheimportanceofincomestatementsAswellasthebasicaccountingequation,anorganization’sincomestatementmustalsobalanceatalltimes.Thisis:Revenue–Expenses=NetIncome(Profit)Ifacustomerisbilled$200,forexample,thisamountispostedasadebitintheaccountsreceivablesandacredittotherevenue.Ifyourexpensesareunchanged,then,yournetincomewillincrease.Sidebar:Whatisgeneralledgerreconciliation?Generalledgerreconciliationistheprocessofensuringthatthegeneralledgerisinbalance.Byreconcilingalltransactions,youensurethatallentriesarecorrectlyenteredandthatyourbooksbalance. Inmostinstances,thereconciliationprocessisperformedbyaqualifiedCertifiedPublicAccountant(CPA). Balancingthebooksisimportantfortworeasons:1.ItshowsacompleterecordoffinancialactivityThegeneralledgershowseverysingletransactionthatanorganizationmakes.Whilecapturingeverythingisdifficulttodomanually,therightaccountingsoftwareallowsaccountantstocapturefinancialinformationdowntothecents.Thismakesforhighvisibilityintofinancialperformanceandcreatesastrongaudittrail.A‘balancedbook’alsoprovidesthefoundationforcheckingeveryotherfinancialstatement.Ifthegeneralledgerdoesn’tbalance,itopensuptheinvestigationintospecificfinancialareasofanorganization,andthiscanleadtosmarterprocessesandinnovationinrecordkeeping. Regularlybalancingthebookshelpsspotmissinginformationquickly,whichsafeguardsagainstlargeandunseenfinanciallosses. However,real-timespeedisonlypossiblewiththerightaccountingsoftware.Withanautomatedapproachtothegeneralledger,accountantscanreceiveinstantalertsassoonasawrongentryismade.Thisensuresaccurateinformationisavailableatalltimes.2.ItimprovesspendmanagementandensuresastrongfinancialpositionThere’salotofpowerinthegeneralledger.Itassistsinmoreaccuratefinancialreportingonrevenueandexpenditure,anditcreatesclarityaroundwhatitemstakeupthebiggestshareofcapital. Inshort,thisallowsfinanceteamstomakestrategicdecisionstoimproveoperationalefficiencyandreducecosts.Italsoensuresahealthycashflowpositionandleadstothingslikeinvestorattraction.Whydoyouneedageneralledger?It’suptoyouhowwellyouwanttounderstandyourfinancialposition.Formanysmallerbusinesses,ageneralledgercostsmoreintimethanitdoesinfinancialsuccess,andmanysmallbusinessownersoptoutofsuchscrutinizedrecordkeeping. Forlargerorganizations,however,thegeneralledgeristhefinanceteam’ssourceoftruth.Hereareafewreasonswhy.1.ItassistsintaxreportingThegeneralledgerconsolidatesallincomeandexpensesintooneplace,makingitpossibletoperformtaxcalculationsquicklyandeasily.Ofcourse,withtherightaccountingsoftware,youcanconfigureittoauto-generatetaxreportsforyou,whichnotonlysavesyoutime,butalsoreduceshumanerrorandincreasescompliance.2.IthelpstocheckandpreventfraudWhenyoudocumenteveryfinancialtransaction,yougaincompleteclarityovermoneyin,andmoneyout.Thismakesiteasytospotfraudulentpurchasesmadeonbehalfoftheorganization,whichhelpspreventheavyfinanciallossesbeforetheyhappen,notafter.3.It’seasytoshowclassifiedaccountsFororganizationswithsensitivefinancialtransactions,theledgercanpaintanaccuratepictureofwhatishappeninginthoseaccountswithoutdelvingintotheirdetails.Quitesimply,thegeneralledgerservesasthebasisfortheincomestatement,cashflowstatement,andthebalancesheet,andshowskeymetricslikeprofitability,liquidity,andtheoverallfinancialhealthofabusiness.Usetechnologytobuildend-to-endfinancialreportingBeforetheinternet,accountantsworewristbracestocounteractthelaboriousactofmanualdataentry(we’renotjoking).Itwaspainstakingworkthatrequiredalotoftime,andevenmorepatience. Whilethegeneralledgerstillplaysanimportantroleinfinancialreportingtoday,withtherighttechnology,financeteamscanautomatethedocumentationofday-to-daytransactionsandfreeuptimetofocusonmoreimportantthings,likedataanalysisandstrategicdirection. However,buildingavisiblepictureofthepre-accounting,accounting,andpaymentsprocesseswithjustonetoolisnearimpossible.But,withtherighttoolsinplacethatseamlesslyintegrateintooneanother,financeteamscanmanageandcontrolactionssuchasprocurement,andthenfeedthatdataintotheiraccountingtooltoensureanaccurategeneralledgerandawell-balancedbook.TofindouthowProcurifyintegrateswithQuickBooksOnline,explorehere.Editor'snote Originalpublishdate:4July2018 We'vesinceupdatedandrepublishedthisblogpostwithnewcontent.Whatdoyouthink? LeaveaComment
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