Back in pre-history, before small, convenient and inexpensive computers, we did all our accounting by hand. We used hardcover binders with pegs, over which the ledger sheets were placed.
We eventually graduated to cheaper three-ring binders, then to computers with QuickBooks (one of the earliest affordable consumer accounting software packages available to small business owners). But with all this new technology, are general ledgers still relevant? You bet!
The Basics of a General Ledger
When we did our record keeping by hand, we had separate journals (from the word “jour,” meaning “day”) for each task. These are the three main journals:
- Accounts receivable: The daily record of the company’s sales and receipts, and the invoices that clients had not yet paid.
- Accounts payable: The daily record of the company’s purchases and invoices the company still had to pay.
- Payroll: The record of each employee’s compensation, the checks written to pay the employees and the related payroll taxes.
Summaries of the monthly activities would be entered into the general ledger—”the Books”—a master record for the company’s activities. We made journal entries using a double-entry system. If you entered everything correctly, the company’s books would balance. In other words, when you added up the balances in each account, the total would be zero.
This was all quite elegant and satisfying when we balanced, but balancing didn’t always happen.
We would often spend hours searching for the error that unbalanced our books. The old general ledgers didn’t have much detail in the income and expense accounts, though we maintained excruciating detail in the balance sheet accounts. In those accounts, we set up a separate page for each vehicle or asset purchased, showing the depreciation for each asset on its own adjacent page. There was a page for each payable and loan. There was a lot of duplicate entries between the journals and the general ledger.
If you need help to ensure your books are balanced and want to download free financial statement templates, see our guide to financial reporting.
Magic Computer Accounting!
Along came the personal computer, for which the software evolved fairly quickly, and today we no longer have to duplicate our entries. When we set up the chart of accounts properly, we only have to enter each transaction once, and it appears in all the appropriate journals (now generally called “reports”), as well as in the detailed general ledger.
This detailed report means you can see every single transaction that went into every account. With a view of all entries, it’s easy to spot payments or deposits that don’t belong in a particular account. This helps your tax professional clean up your books before preparing your tax return.
For example, when looking at automobile expenses, you can see each check or credit-card charge that you entered—for gasoline, car washes, repairs, car payments, etc. This is a very common mistake.
The car payments don’t belong in automobile expenses, because those are loan payments. Part of the payment belongs on the balance sheet, where it reduces the loan balance, and part of that payment goes to the interest expense on the car loan.
Another common error is when the officer or owner deposits money into the company bank account to cover expenses. Sometimes these accidentally get posted to an income account. By being able to see this kind of detail, we can either correct the original entry and put it into the correct account (loan from owner/shareholder), or make a journal entry to preserve the “audit trail.” (That means your books show all the changes made by you, your staff or your tax professional.)
To get the most out of your general ledger (and all other reports), set up the company’s structure properly. Hire someone with experience, or learn how to set up the chart of accounts and classifications for your company’s accounting system.
Creating the right structure in your accounting system means you can track sales and costs of specific products, services or projects, as well as cost of goods sold. It also allows you to monitor all activity in separate divisions, track inventory and vendors, as well as anything else that is important to help you make good decisions.
It’s also worth it to sit down with someone like a QuickBooks Pro Advisor who is experienced in your industry and can help you manage your company’s financial operations.
Once you do this and learn how to record routine and unusual transactions, you’ll be in great shape to maintain your own records. You’ll also learn how to attach copies of documents to your transactions—like printable invoices, contracts, shipping documents, cancelled check copies or anything else you need to support a deposit or payment.
To see a list of documents your business needs to save in order to ensure your accounting is compliant, click here.
What Does This Mean to You?
- Whenever you need to see why you paid something that you don’t recognize, the detail will be right there attached to the payment or deposit entry.
- When you need to find loan documents or insurance documents—if you attached the copy to any one of the payments—you will find the document quickly.
- If you’re ever audited, you won’t have to dig through mounds of paper or files to get organized. You just pull up your general ledger report, click on a specific account, and print out the detail from that account with the attachments. Voila! Your audit papers are done.
One of the best benefits of a well-built general ledger system is the ability to pull all kinds of reports. You can see your profit and loss for this year compared to last year, or this quarter compared to the same quarter last year. You can see how much your expenses have changed in every account from one period to the next.
Seeing these differences can show you when you’re spending too much on something and need to negotiate lower prices with vendors, identify which products aren’t profitable and need to be axed, and it can even help you identify embezzlement.
Love your general ledger: It’s your business’s most important financial tool.
For more tips on managing your business’ financials, see our accounting checklist to learn what daily, weekly, monthly and yearly tasks you need to do in order to maintain your books.