A general ledger for small businesses is not only important in determining how much cash flow is coming in, but it also shows the overall well-being of your business. It is essential if you plan on making your business financially sound and operating positively.
Once you have a better understanding of your general ledger and how it can help your business, it will run much smoother and help you make current and future intelligent financial decisions.
Let's take a look at what a general ledger is and how it can help your business thrive.
What Is a General Ledger?
A general ledger is a book that's used to record all financial transactions for the business. It requires a double-entry bookkeeping method of entering credit transactions and debit transactions. It is a good idea in small business accounting to record all financial activities because you will use this information in many different ways throughout your business life.
General ledgers include five different types of accounts:
- Assets: Assets include any resources that hold value and are owned by the business. Some examples include property, vehicles, trademarks, and patents.
- Liabilities: Liabilities are any debts that the business must pay. Some examples include mortgages and loans.
- Equity: Equity is the amount of ownership you have in your company. Equity = Assets - Liabilities
- Revenue: Revenue is any business income from products or services. Examples include sales from any of your business activities.
- Expenses: Expenses reflect money paid by the business in exchange for a product or service. Examples include fees, equipment, rent, supplies, and utilities.
A general ledger for a small business is not for budgeting your expenses but is only for showing exact amounts of expenses or income. It can help guide you on how your business is doing overall and where you could make some improvements.
Without a general ledger, your business would become a financial mess, and you would be unsure of exactly how much you are spending or earning. As your business grows, you will want to have your financial records to make filing for taxes easier and presenting your business to potential investors.
Why Double-Entry Bookkeeping Is a Good Idea
Double-entry bookkeeping requires you to enter the finances coming in as well as the expenses. This method is similar to balancing your checkbook, ensuring the costs and income are always in balance. Double-entry bookkeeping makes sure your business is not overreaching or spending more than the income from your products and services.
Debits are typically recorded on the left side of the ledger, and credits are generally on the right side. Since the debits and credits must be balanced out, this helps limit the amount of clerical error you might make as your business grows.
The Importance of Keeping a General Ledger
The general ledger purpose for a small business is to show a detailed snapshot of your business in a given month or year. Keeping a record of the five accounts listed above can help you make informed financial decisions. From an accurate general ledger, you will be able to create two essential financial tools: the balance sheet and the income statement.
A general ledger helps make the "big picture" of your company's financial standing clearer. From these reports, you will be able to prepare financial statements, such as your business balance sheet, cash flow statement, and income statement.
Small business accounting can be overwhelming but having a sound system like a general ledger helps make business matters run much smoother. It can help you prepare for audits and taxes, organize business transactions, and even apply for small business loans.
What Information to Include in Your General Ledger
It would help if you had a few critical pieces of information in your general ledgers, whether handwritten or in a computer program. Recommended information includes the following:
- Account numbers
- Account names
- Beginning balance of the account
- Transaction type
- Debits and Credits
- Ending account balance
General ledgers do not need to be highly detailed. Still, these few pieces of information will help you understand your business's financial standing and whether your accounts are accurately balanced.
What Can Your General Ledger Tell You About Your Business?
There are many benefits to keeping small business ledgers. When you keep an accurate log, you can:
- better manage your expenses;
- view financial activity for a specific day or timeframe;
- easily spot any unusual transactions or mistakes;
- see where you can cut costs to maximize your profits;
- prepare for taxes or audits;
- identify and stop any fraud on your accounts;
- look at the overall well-being of your company.
Your general ledger must be up to date, so all of the financial information for your business is correct. This way, there will not be any surprises or accidental imbalances.
Monitoring the Well-Being of Your Small Business
Whether you are just starting your small business or operating for some time now, it is always a good idea to incorporate a general ledger into your accounting books.
Nolan Accounting offers a full range of accounting services including general ledger reports. We provide you with a statement to ensure your computerized reports or handwritten reports have been adequately prepared.
Please contact us to learn more about our general ledger reports and the range of other services we offer to help your small business.