As a business owner, you need to understand how your accounting books work. The most basic element of those books is the general ledger. What is the general ledger and how is it created? Here is a brief overview of the general ledger's two main components.
The Balancing Accounts
The general ledger is the high-level list of accounts in your books that encompass the five facets of accounting. These accounts come together in a balance as well as tell you whether your business is currently in profit or loss. What are these five main accounts? Here is a breakdown of these key elements.
The first three form what is known as the balance sheet of the business.
- Assets. Your business assets include property, intangible things of long-term value such as copyrights or patents, real estate, and equipment. Assets are a positive for the company and have value that lasts more than about a year.
- Liabilities. Liabilities take away from the business's value. This is what you owe. It generally includes mortgages, loans, credit lines, and payments to prior partners or owners.
- Equity. Also known as owners' equity, this is the stake that each owner has in the company. If assets are larger than liabilities, the equity is generally positive. If liabilities outweigh assets, though, the owners might have a zero balance in such equity.
The standard accounting equation is "assets minus liabilities equals equity." If your business owns $100,000 in assets but owes $50,000 in loans, the equity of the owners is $50,000. The equation must always be in balance.
The Other Accounts
In order to keep books, your company must also track how much it owes and is owed at any given time. These two general ledger accounts are expenses and revenue. Revenue is your income from all normal sources of business the company does — largely from accounts receivable records. Expenses are generally taken from the accounts payable account, and they represent what you owe to others.
On the surface, if accounts receivable (revenue) is larger than what you owe in expenses, your business is operating on a basic level of profit. However, these numbers change frequently, so they are not taken at face value. Rather, revenue feeds into your assets while expenses feed into the liabilities accounts. This way, you see the larger picture on the balance sheet.
Want to know more about how to create an accurate general ledger or how to understand the information it provides? Start by consulting with an experienced business accountant today. While it may take some effort to fully grasp these accounting ideas, the end result will be a more profitable company and a smarter business owner.
To learn more, contact a business accounting company.
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