Elements Of The Accounting System: General Ledger Sum up all your business's transactions in the general ledger.

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Every account that is on your chart of accounts will be includedin your general ledger, which should be set up in the same order asthe chart of accounts. While the general ledger does not includeevery single accounting entry in a given period, it does reflect asummary of all transactions made.

If your business is small and cash-based, you can set up much ofyour general ledger out of your checkbook. The checkbook includesseveral pieces of information vital to the generalledger-cumulative cash balance, date of the entry, amount of theentry and purpose of the entry. However, if you plan to sell andbuy on account as most businesses do, a checkbook alone will notsuffice as a log for general ledger transactions. And even for acash-based business, a checkbook cannot be your sole source forestablishing a balance sheet.

An important component of any general ledger is sourcedocuments. Two examples of source documents are copies of invoicesto customers and from suppliers. Source documents are critical inthat they provide an audit trail in case you or someone else has togo back and study financial transactions made in your business. Forinstance, a customer might claim that he never received an invoicefrom you. Your source document will prove otherwise. And yoursource documents are a required component for your accountant attax time. Other examples of source documents include canceledchecks, utility bills, payroll tax records and loan statements.

All general ledger entries are double entries. And that makessense, because for every financial transaction in your business,the money (or commitment to pay) goes from one place to another.For instance, when you write your payroll checks, the money flowsout of your payroll account (cash) into the hands of your employees(an expense). When you sell goods on account, you record a sale(income) but must have a journal entry to make sure you collectthat account later (an account receivable).

The system used in recording entries on a general ledger iscalled a system of debits and credits. In fact, if you can gaineven a basic understanding of debits and credits, you will be wellon your way to understanding your entire accounting system.

As outlined above, for every debit, there should be an equal andoffsetting credit. It is when the debits and credits are not equalor do not offset that your books don't balance. A key advantageof any automated bookkeeping system is that it will police yourdebit-and-credit entries as they are made, making it far moredifficult not to balance. It won't take many 3 a.m.error-finding sessions in a manual system to persuade you toautomate your bookkeeping system!

All debits and credits either increase or decrease an accountbalance. These basic relationships are summarized as follows:

AccountTypeDebitCredit
AssetsIncreasesDecreases
LiabilityDecreasesIncreases
Stockholder's EquityDecreasesIncreases
IncomeDecreasesIncreases
ExpenseIncreasesDecreases

In a general ledger, debits always go on the left and creditsalways go on the right.

While many double entries are made directly to the generalledger, it is necessary to maintain subledgers for a number ofaccounts in which there is regular activity. The information isthen taken in a summary format from the subledgers and transferredto the general ledger. Subledgers showing cash receipts and cashdisbursements are pretty easy to follow. However, some subledgers,such as accounts receivable, inventory, fixed assets, accountspayable and payroll can prove to be a challenge in their dailymaintenance.

Excerpted from Start Your Own Business: The Only Start-UpBook You'll Ever Need, by Rieva Lesonsky and the Staff ofEntrepreneur Magazine, © 1998 Entrepreneur Press

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