Decades ago, a general ledger was a book that sat on your accountant’s desk. Today, it usually sits in a virtual space, like in an accounting software platform. Old and new, both formats have the same goal: to track financial transactions over the life of a company.
Accounts and Accountability
Your ledger holds account information for assets, liabilities, equity, revenue, expenses - everything that goes into your financial statements. By managing these accounts closely, you keep your finger on the pulse of the business.
At a moment’s notice, you should be able to use the ledger to see where your company stands with something like sales revenue or marketing expenses. Of course, this is much easier - and less prone to error - using modern software instead of pencils and paper.
Ledgers promote accountability, which is transparency and integrity in financial management. You can not only see where your company stands, but prove it when requested by lawyers or the IRS.
Day-to-Day Accounting
As your company conducts daily business, transactions are posted to general ledger accounts. Each transaction affects at least two ledger accounts with a debit and a credit, also known as double-entry bookkeeping.
After each transaction, a balance should exist between what was debited and credited. So if a customer makes a payment of $500, the company’s cash account gets a $500 debit, accounts receivable credits $500, and the company’s overall debits and credits balance.
Along the way, as transactions are posted to the general ledger accounts, the company accountant will generate trial balances to ensure everything lines up math-wise. Errors and improperly assigned transactions become obvious during this step.
Software makes trial balances somewhat moot, because the system constantly tracks everything and catches errors. An accounting decision-maker might receive an alert when the debit-credit balance is off, so it can be addressed immediately.
Monthly and Annual Closing
Most companies operate on a monthly accounting schedule, where each month’s ledger is closed out by putting an end point on financial transactions and generating a status report. Things like invoices and payroll are wrapped up for the month.
Closing out is also done at the end of a fiscal year. After everything is accounted for, and the overall debits and credits are equal, the annual ledger is considered closed. This is the magical time of year when your CFO breathes a brief sigh of relief … before launching right into the next year.
Closing a month or year allows other business activities that are helpful in planning, like benchmarking performance month-over-month or year-over-year. You might notice that overdue invoices are highest in January, or that sales revenue is highest in November. Knowing this, you can think strategically about what it means for the company and create new policies or goals.
Staying in Balance
Ledgers are so important, they’re built into our very language. When people talk about “balancing the books,” they’re referring to ledgers - specifically, the objective of ledger reconciliation. In a state of proper ledger reconciliation, company debits and credits match and everything lines up financially.
Your general ledger is really the unsung hero of your financial structure, because it works tirelessly, day in and day out, to keep your company in balance. Whether through accounting software or by hand, maintaining an accurate ledger promotes the long-term health of your business.
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