How do you start preparing your accounting books? For your business to succeed, you have to have eyes on everything about it. That includes financial records. Especially that! Ledgers or accounting books can help you see financial data. Usually, accountants do that for a company. But what if your business can’t afford to hire an accountant yet? And you are not an accounting expert? Whether you can afford to hire one or you are not ana accounting savvy– it is wise to know about accounting or bookkeeping. Don’t be afraid of doing so. After all, technology has made it easier to learn and create these accounting books. Also, for small businesses, at least one ledger could be sufficient– which is the general ledger.
What is this general ledger? A master document or the main ledger. It contains complete records of all financial transactions of your business. With it, you’ll be able to see financial data for assets (fixed and current), liabilities, revenues, expenses, gains, and losses.
If a business has at least a general ledger, it will enjoy these benefits:
- An accurate record of all financial transactions.
- Trial balance compilation (for book balance).
- Income and expenses data (for easier tax return filing).
- Revenue and expense real report (to aid you in spending decisions).
- Unusual Transaction and fraud spotting (and stopping).
- Financial Statements compilation.
Understanding the General Ledger
To help understand the ledger and see how it works, you must also understand three key concepts:
- DOUBLE-ENTRY ACCOUNTING
If you’re familiar with the concept of “debit and credit” that’s what it means by double-entry accounting. But let’s define both words first in the world of accounting. A debit is an accounting entry that either increases an asset or expense account or decreases a liability or equity account. It is positioned on the left side of the ledger. A credit, on the other hand, is entries that increase a liability or equity account or decreases an asset or expense account. It is the inverse of debit and positioned on the right side of the ledger. Double-entry accounting concept means: every debit on one account has a credit on another.
Another document for accounting purposes. The journal supports the ledger as the basis of entries. Journal records every transaction on a daily basis before they’re transferred to the ledger. Other than that, it provides finer details of your business so it will be easy to analyze. There are seven kinds of journals– Purchase journal, Sales journal, Cash receipts journal, Cash payment/disbursement journal, Purchase return journal, Sales return journal, Journal proper/General journal. Usually, the first four mentioned are the only journals needed depending on the nature of business.
To ensure that your business will get the benefits of having a ledger– you must know the basic accounting equation and its rule on the ledger. For double-entry accounting, the equation is (Assets = Owner’s Equity + Liabilities). The rule is simple to see whether the entries are correct– it should be balanced. The sum of all debits for all accounts should be equal to sum of all credits for all accounts. Otherwise, there’s a mistake.
Preparing your accounting books doesn’t stop here. This is simply an overview to at least grasp the idea of having a ledger. More research will help you understand it further and create it for your business.