Every business needs to have a good bookkeeping system. This is so that all of the financial records can be kept in an accurate manner. Among the first financial tools that every small business should set up is a general ledger. Unlike the general journal that only contains a list of transactions, the general ledger records all changes made to the company’s assets, liabilities, equity accounts, among others.
Why You Need a General Ledger
A general ledger is essential to your business as it gives you a bigger picture of your company’s financial situation, allowing you to assess your financial strengths and areas that need to be improved. These may include:
– Seasonal changes in revenue, suggesting that new and improved cash management strategies need to be devised
– Higher debt which could potentially harm the business
– Increase in expenses which could have an impact on the company’s profitability
If you have all the account details gathered in one place instead of scattered in several places, then it is much easier for you to detect the changes and address them. By having an up-to-date general ledger, you will have all the information ready for you when you need to prepare financial statements. Moreover, having a general ledger also gives off the impression to your investors, bankers, lenders, and potential business partners that you know what you are doing when it comes to managing your company’s finances.
What Should Be in Your General Ledger
Your general ledger is based on your company’s chart of accounts, which is a document that lists every main account related to the business. These accounts may include:
– Current assets
– Fixed assets
– Current liabilities
– Long-term liabilities
– Owner equity accounts
– Sales revenue
– Expense accounts
– Gains and losses
These accounts are divided into four categories, including assets, liabilities, equity accounts, and other transactions. Let’s take a look at each of them in detail:
Assets accounts show the value of items within your business. For small businesses, asset accounts typically include cash, accounts receivable, and physical assets, such as equipment or real estate. As for larger businesses, these accounts can also include a factory or plant and also intellectual property, such as trademarks or copyrights.
Liabilities are all the funds owed by your business. These usually include accounts payable, wages payable, notes payable, and other transactions where you pay money owed for a product, service, debt, and other expenses.
3. Equity Accounts
Equity accounts represent the capital invested in the business. For example, if the business pays off all liabilities using its own assets, the remaining amount will be the balance in the equity account.
4. Other Transactions
The entries can also reclassify amounts, correct errors, and close accounts. This kind of information can paint an accurate picture of the company’s transactions over the years.
You can create a general ledger manually or with software. Either way, it is crucial that you constantly keep the information updated. Add your summarised transactions to the general ledger at least once a month. However, Xero makes it simple to do as a daily process, which also gives you the benefit of having up-to-date, live information on your financial situation. Also, make sure that all transactions are entered correctly in the right journals. Dedicate each account to a different page to ensure enough space and avoid any confusion.
If you’re looking for a Xero accountant in Cornwall, get in touch. We’re happy to help.