The general ledger is a bookkeeper's (accountant's) collection and summary of a company’s accounts. The general journal is a chronological record of daily financial transactions and the ledger 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. It is 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 that it is done across the board is to use the T-method from which will be drawn the information that was entered in the journal. 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.
Naming and Numbering Accounts
Naming accounts is done to clearly convey what kind of account it is. Typically, Cash is called Cash, Capital is Capital, Expenses are Expenses--clearly labeled to the type of expense (rent, telephone), Revenue and Accounts Receivable (money due or income) and Accounts Payable (debts owed), and so on. These are a few different types of accounts that are in a ledger, depending on the type of business. Most ledger “codes” for cash are the 100 accounts; which are followed by the 200, the 300, the 400 accounts and so on. 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.
Electronic ledgers have 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 them is that they do all the calculations for you, eliminating the need for adding machines and calculators, except in the strictest of circumstances. Electronic ledgers 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.
Cooking the Books
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 (see Resources) 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
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.