The Purpose of General Ledgers
The general ledger is a bookkeeper's collection and summary of a company’s accounts. The general journal is a chronological record of daily financial transactions, and the general ledger book is itemized by accounts. The general ledger often takes the form of a simple two-column T-account. Formal records may use more columns to display the account balance after each debit and credit posting.
The purpose of the ledger is to serve as a part of a way to keep track of the financial health of your business.
It is up to the accountant or bookkeeper how to set up and name accounts for the ledger, but a typical and simple way is the T-method. With this method, a "T" is drawn on the page, and under the top of the T, debits are listed on the left and credits are listed on the right.
In the case of the formal ledger, a “running balance” of the daily transactions is then shown at the end of each day in a separate column. Opening balances are not always zero and depend on whether you open your business with tangible assets and liabilities that add to or subtract value from your business.
Naming accounts is done to clearly convey what kind of account it is. Typical account names include Cash, Capital, Expenses (often with subtitles), Revenue, Accounts Receivable, Accounts Payable and so on. Besides names, accounts are generally assigned an organized code number, so that data can be viewed, sorted and calculated easily.
Electronic ledgers are types of a ledger with accounting modules that provide advanced tools designed to manage the continuing entry and reporting of detailed financial transactions. Some have tools such as integrated project tracking. These electronic systems can generate many different kinds of reports like a list of entries, income statements, balance sheets, ratio analysis and more. The beauty of these electronic ledgers is that they do all the calculations for you, eliminating the need for calculators and excess labor hours, except in the strictest of circumstances.
Electronic general ledger books also enable you to run detailed audit trails, as well as to make complicated or simple budgets and run profit and loss (P&L) statements. Electronic accounting makes it easier to track discrepancies such as duplicate postings or missing payments and credits which may show up on your monthly bank statement.
When a company augments financial data to yield non-existent earnings, it is called “cooking the books”. Ledgers are presumably used to keep this kind of fraud from happening because book-cooking involves accelerating revenues and delaying expenses, as well as implementing synthetic transactions to get more legitimate financing as well as to improve financial standings on Wall Street. Though the Sarbanes-Oxley Act does not apply to a small or family-owned business, it was created, in light of the Enron and Worldcom scandals, to govern “creative financing” and to control incidents that can lead to fraud, as well as honest error.
Generally accepted accounting principles (GAAP) allow investors a minimum level of consistency when analyzing financial statements for investment purposes. These principles cover things like revenue recognition, balance sheet item classification and outstanding share measurements. It is a set of general standards, however, that can be distorted. Distorted accounting standards can result in what is called accounting noise — noise that allows some companies to paint a rosier picture of their financial bottom line that what actually exists.
In all cases, investors should be cautious when scrutinizing not only ledgers, but also journals, receipts, billing and bank statements, costs of depreciation of machines and equipment, and any other financial data available to determine the true stability or potential of a business before investing.