A general ledger is a collection, or chart, of accounts, used in the most basic and the most advanced accounting systems. Simple accounting systems may display general ledger accounts in a two-column, T-account format, while others may display these accounts using a four-column display that also includes current account balance information. It is crucial for a business to choose the correct accounts to include in the general ledger and set them up in a logical, organised fashion.
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Things you need
- Business financial records
- Physical inventory
Establish general ledger account categories. Basic account categories usually include assets, liabilities, equity, revenue, cost of goods sold and expenses. While these categories may suffice for a small business, others may want to break them down further. For example, assets can include current assets such as accounts receivable and fixed assets such as furniture or equipment, and liabilities can include current liabilities such as payroll and long-term liabilities like a vehicle or equipment loan.
Define and add individual general ledger accounts and account balances. To determine the appropriate accounts to add, think in terms of function, such as “Office Furniture” rather than specifics such as “desk.” Use business records and a physical inventory to list the different types of transactions your business performs and include the account balances of each to add general ledger accounts to account categories. List account balances according to whether they are a debit or credit.
Organise and display general ledger accounts in order of liquidity. Listing general ledger accounts within their account category in descending order of liquidity helps to group accounts together and makes finding them easier. For example, list Cash, Checking Account and Accounts Receivable in the “Current Assets” section.
Introduce an account numbering system to assist in recognising account type and order of liquidity. Start by assigning a range of numbers to the account category and then the account type. A good range for account types, such as Assets, is ranges of 1,000. For example, you could assign numbers in the 1,000s to Assets, 2,000s to Liabilities, 3,000s to Revenue, 4,000s to Cost of Goods Sold and 5,000s to Expenses. Define a narrower range for accounts within each category. For example, in the Asset (1,000) category, you could assign the following: Current Account, 1,000; Accounts Receivable, 1,200; Office Equipment, 1,500; and Office Furniture, 1,520.
Tips and warnings
- A sample general ledger can include accounts such as: Current Account, Accounts Receivable, Office Equipment, Office Furniture, Accounts Payable, Sales, Rent, Utilities, Office Supplies, Fuel, Repairs and Maintenance, and Credit Card Interest and Fees.
- Liquidity is the speed in which you can reasonably expect to convert an item to cash.
- When establishing a numbering system, be sure to allow for the addition of new accounts.
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