A general ledger (GL) contains five sections: assets, liabilities, owner's equity, revenue, and expenses. Each of these sections is a separate accounting ledger or book, so the GL is what is referred to when talking about your company's books. Each ledger book contains several accounts, so your expense ledger will contain these accounts: rent, telephone, electric utilities, office supplies, and all the other individual categories of expenses you might have in your business.
Organizing Your Ledger System
Examine your bank statements and compile a list of regular monthly expenses, quarterly and annual expenses, and another list of variable expenses such as office supplies, marketing, entertainment, and travel. Use these lists in setting up your chart of accounts.
Establish your chart of accounts. The different ledgers in your COA are traditionally numbered as follows: 1000-1999 assets, 2000-2999 liabilities, 3000-3999 owner's equity, 4000-4999 revenue, 5000-5999 cost of goods sold, 6000-6999 marketing & intangibles expense, 7000-7999 other revenues, 8000-8999 administrative, travel, personnel & miscellaneous business expenses.
The marketing & intangibles expense ledger may include 6000-6099 general expenses, 6100 advertising, 6200 financial fees, 6300 charitable donations, 6400 depreciation, 6500 employee benefits, 6600 taxes, 6700 insurance. Each category will be further divided into numbered subcategories such as officers' and directors' insurance, errors & omissions insurance, liability insurance, vehicle insurance, and any other insurance you carry.
The administrative, travel, personnel & miscellaneous business expense ledger may include subcategories such as 8100 rent, 8200 electric utilities, 8300 Internet, 8400 telephone, 8500 legal, accounting & consultants, 8600 salaries & wages, 8650 payroll taxes, 8700 office supplies, 8800 repair & maintenance, and other expenses of doing business.
Take one of your current bills, a utility bill. Mark your ledger account number on it. Look under the administrative, travel, personnel & miscellaneous category of your COA and find the 8200 electric utilities category. If you separate out utilities in your warehouse from those for the office and those for the showroom, you should create account numbers for each of those categories so your warehouse utility bill may be 8220, the office 8230 and the showroom 8240.
Accounting software, like QuickBooks, has eliminated many of the basic chores of accounting such as setting up the General Ledger and Chart of Accounts, but you may wish to consult with your accountant to make sure you are setting up your COA properly. The reason for the COA is to organize the various types of revenues and expenses for tax purposes.
Don't get the term "account" in accounting confused with account in banking. In accounting, it refers to a system or organizing entries into categories so they can be easily segregated in order to make year end tax preparation easier.
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