A general ledger is one of the most fundamental accounting documents and the first one many small business owners use to track their income and spending. A general ledger not only contains easy-to-understand words and amounts, but codes, unique to each business. Learning how to read a general ledger will help you quickly get financial data you want without having to ask your accountant, or whoever prepares your financial documents, for help.
Look at the general ledger to see what categories it contains. Many small business ledgers simply record your bank balance, income and expenses. The most common general ledger includes sections for assets, liabilities, equity, income and expenses. Some are divided into monthly sections, with beginning and ending bank balances shown each month, even though the ledger is a continuing document throughout the fiscal year.
Read the ledger from left to right along the top of the page to learn what categories the ledger records. From top to bottom, your ledger might record individual transactions per month, such as a payment from Smith & Co. From left to right, your ledger might record those transactions in columns such as “Sales.” A payment from Smith & Co. you receive in March will be recorded once in your March expenses section, and once again, directly across the sheet on the same line, in your “Sales” column. This allows you to see your total income from all sources for March, your total income from sales only for March and your total income and income from sales for the year.
Read the general ledger from top to bottom looking at the entries in each monthly section. Look at the income and expenses entered. Recurring expenses, such as utilities, rent and phone, and income such as sales or royalties, are known as accounts. A restaurant might designate banquet, catering and dining room sales as separate accounts.
Look for a separate chart of accounts to determine if your ledger uses codes. Codes help businesses quickly sort information for quick viewing. For example, your expenses might be coded starting with the numeral 6. After that, marketing expenses might use the numeral 1 for the second numeral. All advertising expenses, which are part of marketing, might be coded by the third numeral being a 2. All ledger entries for advertising expenses would then be listed as 612. All ledger entries for promotions might be entered as 613. Do not confuse ledger codes with check numbers, which are entered into a ledger next to an expense amount when you pay with a check.
Look for the account balance column, which is often your bank account or operating account balance. Look at the starting balance at the top of the page, then note the balance change after each transaction is entered. If a $3,000 payment to your landlord is entered, your account balance will decrease by $3,000. If a $1,500 payment from your customer is entered, your account balance will increase.
Examine the general ledger and look for the beginning balance of your bank or operating account for the time period for which you are viewing the general ledger, such as a particular month. Look for the current ending balance along the bottom of the ledger if you are looking for your current situation.
Review your ending balances at the end of each monthly section to determine your performance in any month. Read the figures at the bottom of the page to learn how you are doing in your fiscal year.
The term ACH, which stands for automated clearinghouse, is often used to denote a transaction occurred electronically, instead of using a cash or check. This acronym often appears on your bank statements.