The record you create with double-entry bookkeeping is the basis for your general ledger. The general ledger is a compilation of all the financial records you’ve kept since the inception of your business.
Your general ledger acts as a complete archive of all the financial transaction you’ve made for your company since you started out. From it, you’re able to create balance sheets, income statements and financial statements, allowing you to drill down to find the source when your books aren’t balancing. This record is also what you’ll need for an internal audit, or if you’re being audited externally.
When seeking a loan, the general ledger is your best friend, as it’s the source of all the information your bank will need from you.
Each month, your journal entries should be recorded in your general ledger as a summary, with a separate page for each account.
How Is It Different from a General Journal?
A general journal records all transactions chronologically but not by account. The general ledger breaks it down and further, displays the balance of each account after each entry.
Every time a transaction happens, a source document is produced and then entered in the general journal. Your ledger is for maintaining your accounts in balance, while your journal is a chronological record.
Financial Journals
Financial journals serve a variety of purposes. Some are specific to sales, others record cash receipts and disbursements. But keeping them is a decision made by the business owner. If you’re using a computerized accounting system, journals like these are automatically generated.
The general ledger is where the summary of all the financial transactions your company has made, without distinction.
Journal Entries and the Ledger
Every transaction you make has a source document (canceled check or invoice). These documents are accompanied by a journey entry, usually appearing in the general journal and any special journals you keep for sales and other functions.
Source documents representing the financial transaction become journal entries which are then added to the general ledger to create a central, cohesive record.
Chart of Accounts
The chart of accounts displays accounts which appear on your financial statements. If you’re a large business, you may have hundreds of accounts, from fixed assets and current assets to current and long-term liabilities, expense accounts and sales revenue. These form the basis for your general ledger.
Example
You’ve just purchased a new computer system which cost $10K.
The date of purchase appears in the first column on the left side of the general ledger. In the next column, the journal entry for the purchase is entered. The 3rd and 4th columns record debit and credit amounts.
Assets represent a positive, but also appear as a debit. That means you’d enter the $10K value of the purchase as a debit. If you dipped into cash to make the purchase, or took out a loan to make the purchase possible, the amount appears as a credit, appearing in the 4th column.
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