Constructing the General Ledger for Your Small Business

The General Ledger is the Summary Financial Record for Your Business

Female accountant keying in numbers
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The general ledger is the main accounting record for your business if you use double-entry bookkeeping. It is a complete record of all financial transactions over the life of your company. The ledger is used to prepare financial statements, research out-of-balance conditions and internal and external audits, and includes accounts for assets, liabilities, owners' equity, revenues and expenses. The general ledger holds all the financial information used to create the income statement and balance sheet reports, and serves several main purposes in the financial operation of the business.

While the general journal is a chronological record of transactions, the general ledger is organized by account, and in the formal records of the company may display the account balance after each posting.

When you hear the phrase "keeping the books," it refers to maintaining the general ledger.

Chart of Accounts

The general ledger accounts are built based on the Chart of Accounts for your small business which shows the main accounts that will be shown in your financial statements. The Chart of Accounts can consist literally of hundreds of accounts depending on the size and complexity of the business. The general ledger consists of these accounts, such as each current asset, the fixed assets, each current liability, the long-term liabilities, the owner's equity accounts, sales revenue, each expense account, gains, and losses.

The general ledger is built through transferring journal entries of a company's financial transactions from its accounting journals to the general ledger.

Each financial transaction has a source document, such as an invoice or canceled check, and a journal entry. The journal entry may be in the general journal or in any number of special journals.

Journal Entries

A business enters much of its financial transaction data into accounting journals on a daily basis.

When a financial transaction occurs and a source document is generated, the transaction is entered into the general journal. The general journal lists transactions in chronological order. The date, amount, accounts affected, and the direction in which the accounts are affected are noted. As you note the transaction, you have to make sure the debits and credits remain in balance.

The company also may have a wide range of special journals. Some of the more common special journals are the sales journal, the cash receipts journals, and the cash disbursements journal. The number and types of special journals a company keeps is determined by the individual company. If the company uses a computerized accounting system, the different special journals are generated as you enter your financial transactions into the computer.

General Ledger Entries

Once financial transaction entries are made in the appropriate journals, they are summarized and entered in the general ledger, generally once a month. Each account has a separate page. The detail of the company's financial transactions is stored in the journals. The general ledger shows all the summary information for financial transactions for the company from the general journal and the special journals.