Your general ledger is the core of your company's financial records. These are the central books of your system, and every transaction flows through the general ledger. These records become the history of all financial transactions since day one for the life of your company.
Your system will have a number of subsidiary ledgers, called sub-ledgers. These are for items such as cash, accounts receivable, accounts payable and more. Each entry that is entered or posted to the sub-ledgers will transact through the general ledger account. For example, when a credit sale posted in the account receivable sub-ledger turns into cash due to a payment, the transaction will be posted to the general ledger and to the cash and accounts receivable sub-ledgers as well.
Some items will get posted to the general ledger without any sub-ledger posting. Usually these are financial transactions that have no operational sub-ledgers. The principal portion of a loan repayments or proceeds from sale of assets, are good examples.
There are two main issues to understand when setting up the general ledger. The first is a linkage to your financial reports, and the second is the establishment of opening balances.
Two primary documents of any company will be the balance sheet and the profit and loss statement. Each are derived directly from the company's general ledger. The order of how the numerical balances appear is determined by the chart of accounts, but every entry entered will appear. The general ledger accrues the balances that make up the line items on these reports, and the changes are reflected in the profit and loss statement as well.
The opening balances established on your general ledgers may not always be zero. You may have assets such as some machinery, equipment, and inventory. Be sure to include any cash that has been invested as working capital. On the liability side, you may have any bank loans that were used, as well as trade credit or lease payments that you may have secured in order to start the company.
Don't let the word audit worry you, the audit trail is good and it can keep you out of trouble. I am not talking about a tax audit but if you are called to respond to an outside audit for any reason, your well-maintained general ledger will be the core of discussion. On the other hand, when figuring profit and loss you will have an internal transaction trail to trace any discrepancy, perhaps an unrecorded payment, through your system. You must be able to find the origin of any transaction in order to verify its accuracy, and the general ledger is where you will do this.
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