What is a general ledger? Why is it important?
When asking what a general edger is and why it's so important, perhaps it would be appropriate to think in military terms. Just as the general stands at the head of a battle, your general ledger stands at the head of your business. In other words, it plays a significant role! Your general ledger keeps track of the most important data concerning your business. Knowing the ins and outs of your general ledger is a sure way to keep your business running smoothly, honestly, and successfully. Let's look at a few of the reasons a general ledger is so important. Doing some intense homework about your general ledger is like doing intense homework in school: it usually gets you an A+!
Your company's general ledger can save you a lot of time, headache, money, and legal trouble. The general ledger will save you from a) making ghastly or even minor mistakes when it comes to your financial reports, b) will be a key help when you want to get an overview of what your company has purchased and when it purchased it, and c) allow you, if you so desire, to get a close-up of selected financial transactions to that you're running the entire show as it were and not merely select parts of it or the general gist of it. In short, the general ledger summarizes, neatly and conveniently (assuming you keep it neat, convenient, and up to date) ALL of your company's business transactions.
When it comes to ORG
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When it comes to ORGANIZING your general ledger, here are a few things to keep in mind. Remember, organization is the key. An unorganized army is a doomed army; an unorganized company is certain, over time, to go out of business. Therefore: your general ledger should be divided conveniently into five categories. Typically these categories are revenue, equity, expenses, assets, and liabilities. And these categories can be divided as well, so that you can keep track of every detail having to do with each one of them. When you make an entry in any of the categories, be sure to include the date of the transaction and also a detailed description of the transaction and also, importantly, the balance entries for EACH and EVERY account.
Remember that credits ALWAYS equal debits, and vice versa. There's no getting around it; it's one of laws of business and of life. You don't get one without the other, it's that simple. Therefore: whenever you make a transaction there should be two entries, not one. One entry means you've been careless; one entry means trouble ahead, either with getting something when you need it or explaining something to the IRS or whatever. A general rule of thumb about your general ledger is that it should record all the information you find pertinent to your business. It's really that simple. All the important information should go into the general ledger, period. Your source documents are no exception. What are your source documents? Why, the hard copies of the stuff that provides proof of your transactions down to the last detail. Bank statements; shipping orders; payroll; etc.; these all need to go into the general ledger.
Keep these tips in mind when asking yourself what a general ledger is and why it's so important. Remember, even if you've got an established business and have been a little lax about your general ledger, it's never too late to start. And if you've just started a business, why, it's never too early. Your business ledger will assist you in shunning accounting mistakes, keeping a watchful eye over the actions of your employees, and will save you from making disastrous financial choices. Keep it by you as a wise friend and counselor, and you won't go wrong.
