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A well-organized general ledger is the key to accurate financial statements. Whether you are start a business or streamlining your accounting process, taking the time to learn how to create and maintain your general ledger properly now will not only save you time and headaches later, it can improve financial decision making by producing clear reports of income, expenses and cash flow. This guide covers basic procedures, best practices and maintenance requirements to let you build a general ledger that ensures precise bookkeeping with progressive insight.
A general ledger is a complete record of all financial transactions organized by account. It takes journal entries and the entries of sub ledgers which summarized in schedules showing the balances of asset, liabiliy, owner'e equity revenue and expenses. Before you start setting up, define what it is you want the ledger to do: tax compliance; cash flow monitoring; investor reporting; internal budgeting? This objective will guide design and reporting of the account.
Your chart of accounts is a roadmap for your general ledger. Add accounts categories to match the type of business you do and how you will want to report. Standard accounts are things like assets (cash, account receivable, inventory), liabilities (account payable, loan), equity (owner’s capital, retained earning), revenue (sales income, service income) and expenses (rent, utilities, salary). Develop a numbering system, for example 1000s for assets, 2000s for liabilities, 3000s equity, 4000s revenue and so on with expenses. Don’t make the chart of accounts too thin or too thick; group like items but have separate accounts for significant transactions that need to be tracked.
Write a clear description for each account on the chart of accounts and decide what posting rules will apply. Categorize what kinds of transactions should go in that account and any subaccounts that you might need. So for instance, under expenses you could have one for marketing that has advertising and promotional costs. Description creation lowers ambiguity in entry by staff and encourages standardization through categorizing.
Select the method of accounting (cash basis or accrual) according to legal requirements and business conditions. Accrual accounting records income and expense when they are earned or incurred, making it generally more reflective of the financial health of an enterprise, particularly a growing one. And choose the accounting period (monthly is typical) used for closing down and reporting. Consistent periods make reconciliations and comparisons simpler.
When starting with a new general ledger, out the opening balances for all balance sheet accounts up to the start date. It includes actual cash, receivables, payables, inventories and loan amounts. If you are converting from previous records, reconcile those records in order to arrive at proper opening balances. Beginning equity should include contributions and/or earnings before the starting date.
Determine how transactions will make their way into the general ledger: who is responsible for building invoices, approving expenses and posting journal entries. SoD and approvals also minimize the chance of mistakes or fraud. Standardize the documentation—everyone must have a purchase order, receipt, invoice form and require to keep all of those with the log entry.
Post transactions timely, using source documents and the chart of accounts to identify each entry. Simple entries are sales, checks written to vendors, payroll, depreciation and bank charges. This way there’s a clearly defined process for approval and documentation on non-routine items, including period-end adjusting entries. Postage at regular intervals reduces its accumulation and accelerates prompt financial reporting.
Reconciliation is important for maintaining ledger accuracy. Reconcile bank accounts, notes receivable or payable where necessary and at least monthly reconcile AR/AP, payroll liabilities, etc. Investigate and clear discrepancies promptly. Validation reconciliations prove you that balances of ledgers agree with external statements and interior records, thus minimizing the risk of interferences into the whole system.
Utilize the general ledger to produce basic financial statements: Balance sheet, income statement (profit and loss), and cash flow statement. Reports of this kind should be submitted on a periodic basis and scanned by someone who is accountable. Regulation reports across the system also assist in management decisions, tax preparation and external reporting when required.
Source: Every item in the ledger should be linked to a document. Organize and index electronic or hard copies of invoices, agreements and receipts by date of transaction or reference number. A reliable audit trail can save a company the effort of trying to piece it together on its own, making internal reviews much easier.
As your business grows, you may realize that you need to modify your chart of accounts or how you do postings. Do the account-level checks at regular intervals, such as quarterly or annually and ensure your accounts are still relevant, it's description is recent and still accurate AND that you're getting the reports you need. Consolidate accounts that are duplicated and create new ones for emerging activities.
Invest in a basic accounting template that details any chart of accounts, posting rules, approval process and reconciliations. Provide training for staff who work with financial data so that they know classification guidelines and reporting standards. Training also standardizes the process, minimizes misidentification and promotes accountability.
Properly structuring the general ledger is one of the keystones to successful financials. With a smart chart of accounts and consistent posting rules, routine reconciling, and process documentation, you establish a system that will give the measure, maintain compliance, and allow growth. Begin with a practical structure, maintain it and hone your system to meet the needs of your business as it grows so you never lose sight of managing one that’s remains a tool for smart financial decisions.
Select software that fits the scale of your operations, the volume of transactions you process and the reporting features required for compliance and management — look particularly to those systems with robust vendor support. Seek solutions that can connect to and integrate with your bank feeds, payment processors, point of sale, payroll providers and inventory systems so entries flow into your ledger with fewer manual touches. Make sure the system provides for customizable chart of accounts and exportable reports, so that as your chart changes you can adapt – without losing historical integrity. Before signing on with a vendor, verify security certifications, review update policies, and frequency of releases.
Pick A Cloud Or On-Premise Option Depending On Access Needs.
Check What Integrations Are Available For Banking And Sales Channels.
Validate Some Ability To Customize Chart Of Accounts And Reporting.
Audit Security Certifications and Update Policies.
Validate Data Export And Backup Solutions.
This helps in error reduction, and saves time to concentrate on analysis rather than data entry. To minimize manual reconciliation, activate automatic bank and credit card feeds and match transactions to invoices and bills. Create scheduled recurring journal entries for rent, subscriptions or loan payments so they post regularly and on time. Do a monthly review of automated matches to confirm rules still hold.
Enabling Automatic Bank And Card Feeds.
Create Matching Rules For Invoices And Bills.
Watch Automation logs for exceptions.
Critical Rules To Update Regularly As Business Evolves.
Make sure to back up your ledger data in several places and run test restorations to ensure recovery is successful when necessary. Store backups in encrypted form and implement role-based access controls on the accounting system so only appropriate staff can view or edit sensitive records. Keep a written incident response plan that includes contacts, steps to isolate breaches and how to restore data from backups. Schedule periodic audits of user access and change logs to identify unauthorized activity.
Remote And Onsite Backups With Testing.
Encrypt Data At Rest And In Transit.
Enable Role Based Access Controls And Strong Passwords.
Keep An Incident Response And Recovery Plan.
Regularly Audit User Access And Change Logs.
If you engage in international buying or selling, create currency accounts and establish a policy for recording cash rate changes so that the gains and losses are accurately captured in your ledger. In order to align your entries with period-end reporting requirements, witness the exchange rate and balance sheet items in accordance with your accounting method. Maintain detailed logs of the rates applied and sources referenced for potential audit questions or tax submissions. Maintaining a separate subledger for foreign currency receivables and payables is another option to simplify reporting and reconciliations.
Keep Separate Currency Accounts For Major Currencies.
Transaction Rates and Source References.
Ending Period Revalue For BS Items.
Use subledgers for foreign receivables and payables.
Tracking Exchange Gain And Losses For Reporting.
Maintain a fixed asset register outside of the general ledger, including acquisition date, cost, useful life and disposal details in order to calculate depreciation correctly. Connect the register to your ledger for automatic posting of depreciation and disposal journals and accurate carrying valuations. Select a depreciation method that is in alignment with the tax guidelines and the organization policy, document any exceptions with the approvals. Identify posting errors when reconciling accumulated depreciation and asset balances during period close.
Maintain A Thorough Fixed Asset Register With Dates And Costs.
Automation For Depreciation Journals Linked To Asset Records.
Choose Tax And Policy Consonant Depreciation Methods.
Record Asset Dispositions And Any Impairments.
Reconcile Accumulated Depreciation Regularly.
If you hold inventory in your business, be sure to implement a system that tracks quantities and costs by SKU so that cost of goods sold and margins are accurate. Select a method of inventory costing (FIFO, LIFO or weighted average), and apply the chosen method consistently and note tax and reporting implications. Combine POS or warehouse data with the ledger so purchases, returns, adjustments, and shrinkage are properly entered in a timely manner. Check physical counts from time to time and resolve variances.
SKU Wise Inventory Tracking With Quantity And Cost Details.
Choose And Record A Standard Costing Method.
Ledger with Warehouse Or POS Feeds.
Conduct Regular Physical Counts And Reconcile Differences.
Shrink Reduction And Adjustments With Documentation.
Draft a formal closing checklist that includes reconciliation of all PC bank accounts, review of any outstanding receivables and payables, accruals & prepayments posting, fixed asset & inventory balance confirmation. Make sure that responsibilities and deadlines are assigned so that everyone on the team understands who does what and when, which helps avoid delays and steps being missed. Roll forward all of the backup documentation used at the close and generate a sign off record that each control/reconciliation was reviewed. A checklist is a good way to make the next period close more efficiently and to bring new staff up to speed on what needs to be done.
Reconcile Banks AR AP Payroll And Loan Accounts.
PSAP And Period End Adjustments.
Verify Fixed Asset And Inventory Balances.
Review And Sign Off Document Per Task.
Schedule Post Close Review For Lessons Learned.
Create a set of internal reports beyond traditional financial statements that facilitates the decision making process — gross margin by product, customer profitability, cash runway forecasts. Specify a few key performance indicators and trend it in reports so managers can identify deviations early and take action. This is why you can automate the generation of reports and distribute them to stakeholders on a regular cadence so insights are timely rather than ad hoc. Periodically review the KPIs to check if they still represent priorities and make necessary changes to thresholds or design for better understanding.
Monitor Gross Margin By Product Or Service Line.
Using Customer Acquisition Cost And Lifetime Value Best Practices.
Watching Cash Runway And Projected Cash Flows.
Receivable Aging And Concentration Risks.
Show Trend Charts And Variance Analysis To Managers.
Use payroll integrations to connect with your ledger so that gross wages, employer taxes and benefits and associated liabilities automatically post and can be reconciled against your payroll reports. Keep schedules of payroll tax due dates, and ensure that liabilities are recorded when incurred so that the balance sheet accurately reflects obligations. Monitor accrued vacation, bonuses and other employee liabilities and eliminate them as they are paid. Vendor payroll reports and signed timesheets or other approvals should be source documents for auditability.
Adding Payroll or Other Provider Outputs into The Ledger
Establish Accruals For Employer Taxes And Other Benefits?
Keep A List Of Payroll Tax Deadlines
Monitor Accrued Time Off Bonuses and Other Liabilities
– Keep Supporting Payroll Reports Timesheets And Approvals
This can include reconciliations, schedules, supporting invoices, banking confirmations and ledger accounts mapped to financial statement lines; create an audit pack on a yearly basis or for each statutory filing to minimize the back-and-forth during audits. Retain tagged digital copies with reference numbers to facilitate retrieval; retention policies should comply with tax and legal requirements. Reviewers are often provided with a guided index explaining major movements and one-off items to speed the review of audits. Auditors spend an infinite amount of time trying to read the dizzying number of incoming files, so make sure you keep track your document access with secure file sharing logging — i.e. “we know who has seen sensitive documents — and they have it behind a login.”
Reconcile Schedules And Backup Invoices For Audits.
Label Documents To Be Retrieved By Ledger Reference Numbers.
Keep Retention Policies In Accordance With The Law.
Offer An Index Explaining Major Movements And Exceptions.
Use Secure Sharing And Access Logs For Auditor Reviews.
Create a governance process that periodically reviews ledger policies, account definitions and control effectiveness, includes stakeholders from finance operations and leadership. By leveraging feedback from audits, reconciliations and management reports to inform updates around processes and plug policy gaps, the ledger can change in lockstep with the business. Keep a change log that shows who made structural changes to the chart of accounts and the reason, along with evidence of approval. Establish measurable targets for close times, error rates and report delivery and performance against these targets.
Conduct Regular Governance Reviews With Cross Functional Stakeholders.
Journal And Authorise Adjustments To The Chart Of Accounts And Guidelines
Metrics For Tracking Close Efficiency, Error Rates And Timeliness.
Based on Audit Results And Feedback, Implement Improvements.
Offer Recurrent Training When Policies Or Systems Change.
Segregate key accounting functions to minimize error and intentional fraud. All significant payments should require two approvals. Review assignments regularly.
Specify Approval Limits And Thresholds Early.
Payments And Reconciliation Should Be Carried Out By Different Parties.
Involve IT in ATIP and Document Changes.
Keep Authorization lists & update on staff change.