How Does a General Ledger Work?

July 5, 2019

Recording transactions and creating financial reports are vital tasks for your business. Accounting helps you have a clear picture of your company’s financial health and make informed decisions. One of the most effective ways to stay on top of your transactions is by maintaining a general ledger. Here’s a basic guide to general ledgers and how a Los Angeles accounting service can help you. 

Basics of a General Ledger and Double-Entry Accounting 

A general ledger serves as the master document for your business’s finances. It keeps track of: 

• Assets
• Liabilities
• Gains
• Losses
• Revenues
• Expenses

In order to develop a general ledger, an accountant service Los Angeles uses the double-entry bookkeeping method. This strategy means that every entry to an account has an opposite entry to a different account. Put simply, every credit has a debit.

Journals to Ledgers

It’s important to note that transactions don’t go to the ledger, the master document, first. Instead, they originate in journals. Common accounting journals are: 

• Purchase Journal: For documenting credit purchases, such as equipment or supplies.
• Sales Journal: For recording credit sales.
• Cash Receipts Journal: For recording cash influx.
• Cash Payments Journal: For recording cash outflows. 
• Generally, journals are created on a daily basis whenever transactions occur. Then, once they are reviewed and confirmed, can be transferred to the general ledger. 

Benefits of a General Ledger

It’s up to you and your Encino accountant to determine if having a general ledger is best for your company. But here are some compelling advantages to consider: 

• It gives you an accurate record of every financial transaction.
• It makes it easy to file tax returns since it keeps income and expenses in one place.
• It helps you avoid overspending by reporting revenue and expenses.
• It assists you in creating financial statements to evaluate and prove your financial health.
• It helps you identify unusual transactions and fraudulent activities.

Once you get the hang of using a general ledger, you’ll realize how useful it is.