A general ledger is an imperative accounting record accounting firms use to evaluate their clients' business health and form the basis for significant financial reports.
In our general ledger guide, we'll delve into what a general ledger is, its primary function, why a general ledger is important for accountants, and how general ledger software can move the needle for your practice.
What is a general ledger?
Thousands of years before the invention of Excel, over 5,000 years ago, the ancient Mesopotamians used general ledgers to record quantities on clay tablets. By 1340 AD, this evolved into a double-entry system, a new accounting method mainly used by merchants and lenders in northern Italy.
Let's travel through time, from the dawn of civilisation to the 21st century, and general ledgers have withstood the tests of time. With the invention of computers, the way we record transactions has been simplified. Long gone are the etchings on tablets and general ledgers in books. We now have efficient general ledger software in the cloud and blockchain technology, but in their essence, their purpose remains unchanged.
When we look retrospectively, the reason accounting ledgers have endured is a testament to their simplicity and comprehensive nature.
The definition of a general ledger is that is a document containing a detailed record of a client's financial transactions over a month, quarter or year.
Accounting firms can use a general ledger internally to track and evaluate their business finances and inform their growth strategy. However, in our article, we'll be talking about its primary use in accounting firms as working documentation forming the basis for generating financial reports and analysing their clients' financial health.
The components of a general ledger
A general ledger is usually divided into one of the following categories to build a picture of financial transactions over time, known as a chart of accounts:
- Expense Accounts: rent, depreciation, team wages and salaries, utilities.
- Equity Accounts: capital, stock, dividends, retained earnings.
- Revenue Accounts: service feeds.
- Assets Accounts: accounts receivable, cash, inventory, fixed assets.
- Liability Accounts: accrued expenses, accounts payable.
The importance of the general ledger in accounting
The importance of general ledger in accounting cannot be understated. A general ledger is the most effective way to:
- Accurately track all financial transactions and cash flow,
- Stay on top of spending with a report on revenue and expenses,
- Evaluate profitability, liquidity and overall financial health,
- Make the filing of tax returns much easier, as all expenses and income are available from one place,
- Maintain essential information for the compilation of financial reports,
- Easily spot and prevent unusual, fraudulent activity immediately and
- Complete a trial balance so that the books are all balanced.
How does a general ledger work?
A general ledger, both in a physical and digital record, will give accountants a detailed view of every transaction their business clients have conducted within the past month, quarter or year.
The general ledger works as a bookkeeping basis for financial reporting and becomes a
A general ledger is also instrumental in preparing critical financial documents, such as an income statement and a balance sheet.
How to do general ledger accounting
A general ledger is a living, breathing repository for financial transactions. Therefore, it requires timely maintenance and updates to ensure it's an accurate representation of your firm or your client's financial health.
Here is the best practice process for conducting general ledger accounting.
Journal entries
A journal entry is an individual financial transaction recording, typically detailed with a debit or credit amount, the transaction date, accounts affected and a brief description.
A journal entry is entered and organised according to the accounting equation (assets = liabilities + equity).
Journal entry bookkeeping captures each financial event, providing a foundation for subsequent accounting activities, such as posting to the general ledger.
Posting from journals to the general ledger
The next step after recording a transaction within a journal is to transfer it to the corresponding general ledger account. Posting into the general or subsidiary ledger will ensure that your accounting data is current.
A trial balance
A trial balance lists all general ledger accounts and their respective balances, ascertaining that your client's total debits and credits are equal.
How to do general ledger reconciliation
A reconciliation process for an accounting ledger is where each account is double-checked to ensure everything is accurate.
The general ledger reconciliation process consists of examining any journal entries to correct any errors that might have occurred and comparing balances against financial information, such as bank statements.
The reasons your accounting firm needs a general ledger
A general ledger is a fundamental component of accounting. Here are several reasons why you need it:
- Centralised, holistic recordkeeping: A general ledger serves as a single source of truth for all financial transactions of your business clients and offers a comprehensive view of a client's finances across different timelines.
- Financial reporting: The data contained within a general ledger can be used to prepare vital financial statements for your business clients, such as an income statement, cash flow statement and a balance sheet. These are crucial statements for assessing a business client's financial health and performance.
- Advisory services: General ledgers can help accountants deliver valuable advisory services to their clients. They provide insights into revenue, expenses, assets, liabilities and equity that help accountants assess their client's business performance and will inform future strategic planning and decision-making.
- Identifying potential fraud: Keeping a detailed general ledger helps identify fraudulent transactions in your clients' accounts so they can be remedied before becoming significant issues. Please read our guide on cyber security for accounting firms.
- Fostering transparency and accountability: Every ledger entry is traceable back to its origin, meaning you have a transparent trail of all your client's financial activities. A general ledger acts as a trail for internal and external audits, meaning it is easy for auditors to trace and verify the accuracy of financial transactions. Accountants are subject to rigorous accounting standards and regulations, and general ledgers can assist in compliance adherence.
The challenges of general ledger
At The Access Group, we work with accounting firms of all shapes and sizes, and so we've been able to identify common pitfalls that often go hand in hand with general ledgers:
- The risk of human error: we are only humans and make mistakes. Even the most detail-orientated accountant can mistype a number, omit a ledger entry and place a transaction in the wrong category. Overlooking these errors can lead to discrepancies unless you put regular reviews and reconciliations in place.
- Poor accounting practice processes: if you invest the time, technology and attention into your accounting function, it will take a little while for your general ledgers to get messy. The easiest way to mitigate this? Putting in place adequate internal processes and controls for your accounting firm.
- Managing complexity: accounting firms must stay abreast of continuously evolving accounting standards domestically and internationally. Ensuring that general ledgers align with these changes can be a challenge. Additionally, specific transactions, such as mergers and acquisitions, are intricate and challenging to communicate within the general ledger. These complexities are best overcome by adopting meticulous attention to detail.
Safeguarding your practice against these general ledger challenges will help you maintain your practice's integrity and strengthen your client relationships.
Why you need general ledger software
As we learned earlier in our guide, general ledgers were historically kept on paper. Technological evolution in the past few decades has paved the way for general ledger software for accountants, allowing an accountant to create advanced financial and management ledger reports for their clients.
General ledger accounting software is at the heart of high-performing accounting practices, as it is where accountants can conduct many of their most important daily functions, such as preparing accounts for their clients and customisable financial reporting, providing an additional layer of information used to improve clients' services and drive advisory services.
General ledger software can connect to your client's accounting software to manage account compilation without rekeying financial data.
General ledger: in summary
As we've uncovered, a general ledger has been a fundamental pillar of financial records for centuries. Accountants with small business clients can use best practice general ledgers to kick-start the process of building key insights that inform the future direction of their business.
In modern-day accounting practices, you're more likely to see general ledgers within accounting practice software. In this workspace, accountants can fulfil most of their daily tasks, such as preparing and finalising accounts and producing comprehensive reports.