Running your own business, you’ll likely encounter various accounting terms, such as general ledger accounting.
If you’re keen to manage your bookkeeping accurately, track financial performance and make solid spending decisions, we’ll explain general ledger accounting to help you move forward with confidence.
This guide breaks it down step by step, explaining:
- What is general ledger accounting?
- How does general ledger accounting work?
- What is double-entry bookkeeping?
- Debit vs credit: what’s the difference?
- Why use double-entry bookkeeping?
We’ll also clarify all the common terminology such as trial balance, balance sheet and income statement (aka the profit and loss account) so you’re ready to get started!
What is general ledger accounting?
The basics of general ledger accounting are simple. Essentially, you record each transaction in a category, separating spending, income, assets, liabilities and equity.
It’s an established way of tracking how much profit you’re making and the value you hold in the business through stocks, equipment, machinery and vehicles, less obligations like debts and bills falling due.
Accountants use general ledger accounting as a tried and tested system, which slots easily into tasks like submitting accounts to Companies House or filing tax returns.
Typically, each account has a unique code used to enter new transactions into your accounting software – although an intuitive app can handle a lot of this manual accounting admin for you (more on that shortly!).
How does general ledger accounting work?
Every transaction is recorded in your general ledger. You use a system called the chart of accounts – often abbreviated to COA – to keep track of all the separate expense, income, asset and liability categories.
You can add new accounts and remove them, so if you start receiving a new income stream, you can split this out and see how much you’ve earned through each branch of your business.
It’s important to separate accounts into categories because this automatically produces reports like your balance sheet and profit and loss account.
Chart of account sub-categories in general ledger bookkeeping
Most charts of accounts also have sub-categories, which isn’t anywhere close to as complex as it sounds.
Let’s say you have a ‘cash’ account but want to see how much of that cash is held in petty cash, in the safe, and in hand – you could have a code for cash, say 003, and then three sub-accounts to ensure everything you spend is accurately recorded.
In that scenario, you might choose 003A to C as a speedy, uncomplicated way to record each transaction.
We’ll explain double-entry bookkeeping next, but the core framework of general ledger accounting is that every transaction has an opposite.
- If you buy a new tool, that will increase your expenses but add to your assets.
- Inventory purchases debit (or add to) your stock value, but credit your accounts payable with the amount you owe to the supplier.
You don’t need to study the double-entry system for every type of transaction – it’s something you might need for paper-based general ledgers. Still, in the modern world of accountancy, the software will automatically sort out your debits and credits for you.
What is double-entry bookkeeping?
The best way to explain double-entry bookkeeping is that it’s a universally accepted system of ensuring every sale, purchase, expense, and debt is properly recorded in your balance sheet and profit and loss.
The principle is that every entry has a balancing transaction, as we’ve illustrated above.
Again, we’d stress that you aren’t required to study bookkeeping to apply general ledger accounting.
Gone are the days of painstakingly writing each figure into a huge ledger book, totalling out the bottom, and inevitably arriving at an unbalanced figure.
While conventional manual bookkeeping relies on knowledge about the corresponding debit or credit for every individual transaction, advanced software such as Countingup takes all the pain out of double entries.
This option doubles up as a business current account and an accounting app – so whatever you spend, save or earn is automatically accounted for, with minimal admin hours!
Debit vs credit: what’s the difference?
If you have no aspiration to become an accounting professional, you probably have many more tasks to focus your time on than learning the concepts behind double-entry accounting. Still, it doesn’t hurt to have at least an idea of how your accounting app manages your transactions.
Debit means left, and credit right – it is that simple!
These terms, usually shortened to Dr and Cr, indicate which side of the column in your trial balance a figure goes.
By way of a super-quick summary:
- You debit to increase an asset or expense account, with an opposite credit lowering the balance.
- Credits in liability, capital and income accounts indicate an increase and vice versa with a debit.
Modern accounting tech will show you the outcome of those transactions in your trial balance, but provided you enter each income or expense and select the appropriate account in your software; you’ll not need to know much more than that!
Why use double-entry bookkeeping?
Double-entry bookkeeping provides a reliable framework to ensure you’re keeping watertight financial records.
Balancing the books means that when you total up your debit and credit columns, the figure at the bottom matches exactly – indicating that the double entries have been correctly recorded.
The system aims to minimise or eliminate the capacity for error. If you use Countingup, you’ll know before a problem arises because your accounting software will raise a query if something doesn’t seem right.
Your entries feed into your financial reports, including income statements and year-end financial accounts.
What is a trial balance?
So, now we’ve got to grips with double-entry bookkeeping and general ledger accounting, we’ll illustrate how that creates a comprehensive set of books.
Your trial balance is like a summary of the end balance in every account on your chart of accounts. This report shows the total end value in every account and will highlight if there are any bookkeeping errors, usually making it easier to spot the issue.
What is a balance sheet?
A balance sheet reflects the assets you own within your business, compared to the liabilities, which means money owed such as a loan account, credit card or payments due to your suppliers.
At the bottom of the balance sheet, the net total is calculated as assets – liabilities = equity.
If you have stockholders, they’ll want to see this figure to get a good idea of their share worth. For sole traders and self-employed businesses, this is the value retained in the company.
What is an income statement?
An income statement is the same thing as a profit and loss statement, or P&L. This record shows all of the income and expenses, arriving at a profit or loss at the accounting period end.
You calculate the net profit, or loss, by taking revenue, less expenses.
Accounting software will add together every expense and sale you’ve made, so these must be categorised correctly to see how your earnings split between, say, stock sales and income from postage and packing.
Save time on your bookkeeping with Countingup
There’s little doubt that maintaining general ledgers can be stressful and time-consuming – making it a challenge for many small businesses to keep up with.
Countingup is the business current account with integrated accounting software, managing all your financial data in one user-friendly app.
Features include automatic expense categorisation, instant invoicing, photo capture tools for receipts, tax estimating functionality, and cash flow reporting to control your business finances.
Business owners can also share bookkeeping with their accountants without concerns about missing double entries, inaccuracies or duplications – seamless, simple, and straightforward!
Find out more about how Countingup can support your business here.