The general ledger tells the story of your business. It’s a collection of all your accounting transactions that can then be used to create reports, answer questions, and make key decisions.
And it’s one of our favorite things here at Beyond. But it’s possible you’re thinking, “what is the general ledger and why should I care?”
As a business owner, if you hire the right outsourced bookkeeper, you won’t need to learn how to interpret your general ledger on your own. However, it’s still important to understand what it is, why it’s important, and how to use it to help you.
The general ledger tracks all your financial transactions
When I first started working in accounting, the general ledger was a huge, physical book. This is where bookkeeping gets its name: before bookkeeping was done with software or cloud solutions, we would manually record transactions in smaller books, total key numbers, and then transfer those amounts to a large general ledger book.
Now, most modern accounting platforms have a digital general ledger, which saves us bookkeepers lots of time (and hand cramps!). Whether it’s physical or digital, a general ledger contains all the financial transactions of your business, organized in this order:
- Cost of goods sold/Cost of sales
- Other Income
- Other Expense
Each transaction is made up of at least two parts allocated to debits and credits. In the general ledger, the debit amounts must equal the credit amounts. If that’s not the case, we know there’s an error or inconsistency somewhere, and can go back to ensure all your data is accurate.
But the general ledger does a whole lot more than just keep your transactions organized. It can also tell the whole story of your business.
The general ledger is your source of truth
A skilled bookkeeper or accountant can read your general ledger as easily as you read a book. Where you might see an endless row of numbers, we see the truth behind your business which we can then use for several important purposes:
1.Create reports and financial statements
A general ledger is behind every report you’ve ever had. It’s the evidence that backs all your numbers. If the numbers on a report are not what you expected, you can look back at the general ledger to understand why or identify inconsistencies. An error can be as simple as something being categorized incorrectly such as a business meal being accidentally categorized as office supplies, but without the details of the general ledger you’d never be able to catch that mistake.
2. File taxes or apply for loans
When filing your taxes, you or your tax accountant may refer back to the general ledger to ensure everything is itemized correctly. If, for whatever reason, you’re selected for an audit, your general ledger will also be the evidence the IRS needs to confirm the numbers you’ve submitted to them are accurate.
It’s the same when you’re applying for a loan. A loan provider, like a bank, will want to know exactly how much money is going in and out of your business and for what purposes. The general ledger provides all these details. It’s like the ticket you need to move forward on your loan application!
3. Make business decisions, big and small
The general ledger contains all the chapters of your business story so far, but it can also help you figure out what the next chapter will hold. If you’re struggling with a decision for your business, big or small, the general ledger can be used to support that decision or advise against it. Even transactions from several years ago can help determine what your next steps will be, and that’s why it’s so important to keep everything recorded and organized.
The good news is, you don’t have to learn to read a general ledger if you have the right team working beside you. At Beyond, we love the general ledger; it creates clarity, answers our questions, and reveals the truth behind your business. Inconsistent cash flow, missed payments, or unaccounted credit charges can all be traced in the general ledger, and that’s why we’re so passionate about it.
You deserve complete clarity and confidence in your business’ finances. To work with a team that can read the general ledger like a book, get in touch with us today.