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General Ledgers and How They Work for Entrepreneurs

Guest Post | Sep 6, 2022

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A general ledger is a master document that contains a company’s transactions categorized neatly. It has a detailed record of financial statements such as cash flow, income statements, and balance sheets. The detailed transactions combined form a trial balance.

A list of each account used, its beginning and ending balance is called a trial balance. Since each specific journal entry has to balance, the total of all debits and credits must balance a well. This is all built to provide a view of a company’s financial status for entrepreneurs. This post will define what a general ledger is, and how it works for business people.

Why Do You Need a General Ledger? 

A general ledger is the foundation of a company’s financial statements. These statements are used to evaluate different measures of the overall financial health which includes liquidity and profitability.

Can a General Ledger Be Used to Identify Fraud? 

Yes, general ledgers can give information that may not be noticed by just looking at financial statements. You can compare transaction data from different time periods, this may cause unusual, erroneous, or fraud to be identified. If you analyze changes and trends in the trial balance it may yield crucial information. The general ledger also comes in handy when filing taxes because all income and expenses data is available in one location.

How Does a General Ledger Work? 

Accountants record financial transactions in the general ledger which uses the double entry accounting method. Each transaction is recorded as a journal entry in two accounts. The two accounts consist of a debit and credit account. The debit and credit accounts must balance to improve accountability and accuracy.

The Double Entry System

Generally, there are two methods of accounting. The single entry accounting method used by solopreneurs, and double entry. However, the double entry makes it easy for entrepreneurs to prepare financial statements. Each entry has to include a single debit and credit, but can use more. For the system to balance, the total number of debit and credit has to always be equal.

General Ledger Account Types 

General ledger accounts are categorized as follows:

Assets - Equipment, land, accounts receivable, and cash
Liabilities - Loans payable, bonds payable, and accounts payable
Income - Investments income, and gains on disposal of assets
Expense - Salaries, rent, and depreciation expense
Operating revenue - Sales and service fees

Journal Entry in Accounting

The journal entry is used along with the general ledger. Each journal entry has details to one business transaction. The details contain the date, the amount credited and debited. There is also a description of that transaction and the affected accounts. There may also be tax details, affected subsidiaries, and more. It is important to enter complete and accurate journal data so that financial reports, and the general ledger are also accurate based on this information.

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Endnote

The information above is important to entrepreneurs and businesses alike. Being able to trace and know where money is going to and coming from is crucial to its survival and growth. The general ledger will assist you to do just that. Implement the above information and watch your business thrive.

 


NCFA Jan 2018 resize - General Ledgers and How They Work for EntrepreneursThe National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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