Even if you’re paying an account to handle all of your business accounting for you, it certainly helps to have at least some understanding of accounting matters, in the (hopefully unlikely) event that there will be issues to resolve.
In this article, we’re going to quickly cover some of the basics. This includes explaining what a general ledger is, explaining why it’s important that the accounts are kept in a specific order, listing the order of the accounts on the ledger, and explaining what each of the terms actually means.
It sounds more exhausting than it is, though, and we promise to keep it simple for you.
A general ledger, often referred to as GL for short, is THE main record keeping system for a company’s financial data, complete with records of all of the company’s debit AND credit account records, which are then validated by way of a trial balance.
In a general ledger, it is of the highest importance that every single transaction is recorded, no matter how big or how small.
It is only by doing this that your accountant can get the precise figures that then go on to form the critical financial accounts at the end of the financial year. This includes the Balance Sheet, the Profit and Loss statements, and if to be included, a Cash Flow statement.
And it is from these financial statements that managers of the business are able to see, with a great degree of accuracy, exactly how the business is performing. From these statements, the business can make judgements on whether the business is successful, growing, or struggling.
This data can help managers to decide, for example, if the price for goods and/or services should be increased, if they need to take out a business loan, is it time to sell the business, do they need to decrease expenses, and whether shareholders can take out a dividend.
And all of these decisions rest entirely on the accuracy of the general ledger. So, when it comes to preparing the financial statements at the end of the financial year, your accountancy firm must be able to access the data they need very rapidly, so that the financial statements can get prepared in time.
And this in turn means that the accounts team must be able to find all the information that they need quickly and easily. And the most effective way to achieve this is by having all of the accounts laid out in a specific order.
The usual order of accounts in the general ledger is as follows:
(which is made up of Common Stock, Retained Earnings, and Dividends
In that order)
But, if all that sounds like gobbledygook, then it’s not going to mean much to you. In which case, here’s a brief run down of what all those terms actually mean. This should help to explain things.
All of the definitions that we’ve obtained all come from https://www.accountingcoach.com. (There are other definitions available on other sites, if for any reason these definitions don’t quite make much sense to you.)
Things that are resources owned by a company and which have future economic value that can be measured and can be expressed in dollars.
Obligations of a company or organization. Amounts owed to lenders and suppliers.
The difference between assets and liabilities, such as stockholders’ equity. This is the value that a business can be currently valued at.
The Equity accounts are made up of Common Stock, Retained Earnings, and Dividends. Let’s define these individually.
– Common Stock
The stockholders’ equity account that reports the par or stated value of the issued shares of common stock.
– Retained Earnings
The cumulative amount of earnings since the corporation was formed minus the cumulative amount of dividends that were declared.
The cash dividends that a corporation pays to its stockholders (or shareholders).
Fees earned from providing services and the financial amounts of merchandise sold.
Costs that are matched against revenues on the income statement. This can include any of the running costs that the business incurs.
So, as we have explained, it is vital that all financial records are properly kept in the general ledger in the usual order. This way the finance team is in the best possible position to prepare all the financial statements at the end of the financial year, to provide all the financial data required to make important decisions for the future of the business.