A general ledger is primarily used by businesses to keep track of all financial transactions that the company makes. Initially, a general ledger was manually kept, but now with advancements in technology, general ledgers are computerized with software. Debits, credits, cash and accounts receivable are all compiled in the general ledger in order to generate all of the financial statements needed to balance the company’s finances.
The general ledger also keeps records of the bills, shipping orders, invoices and whenever money is moved from one area to the other. Financial reporting of balance sheets and profit-loss statements are constantly traced to keep track of the financial impact they cause the company. The most important role of the general ledger is to accurately reflect the company’s true standing.
General ledgers that are not kept in order could lead to bigger issues for a company. With business finances in disarray, what is being spent on budgets and transactions could throw off expenditures even further. The general ledger also helps companies determine whether a business is about to face a potential problem. A general ledger that needs to be reconciled will take time to remedy, and the corrective action that needs to take place could come too late. Consequently, keeping a clean and precise general ledger will always make it easier to review every aspect of a businesses finances.
General ledgers also serve other purposes in the financial operations of a business, such as:
- Research – While reviewing a general ledger, fluctuations in financial activity can be easily detected if anything seems out of the ordinary. A discovery of unbalanced accounts could be detected from the balance sheet and the external accounts. This will help ascertain if something was improperly recorded.
- Auditing – The most important item to review financial records for auditing is the general ledger. The auditor will use the general ledger to make sure everything is properly classified with a detailed explanation of income and expenses.
- Budgeting – The general ledger gives a more accurate portrayal of what kind of budget the business is going to need for next year. By using the general ledger, a business can seek out one-time expenses or uncommon transactions and then take into account how much is going to be needed for the operating budget. Without this, the budget for the year could be over- or under-inflated.
PADGETT BUSINESS SERVICES® has been helping small businesses with general ledger software as well as various other small business services for more than 40 years.