Introduction

What Is General Ledger?

General Ledger is a means by which you can measure the financial health of your company. In accounting terms, the "General Ledger" records each transaction coming into or going out of your company that involves the exchange of money, or involves an increase or decrease in the overall value of your company. These transactions can include everything from cash receipts to depreciation on equipment; all such transactions should be reflected in General Ledger.

What Is an Account?

In order to record a transaction, you enter the amount into an "account". The full set of your accounts is called the "Chart of Accounts". Over time, as you examine the detail and later the summary of the activity in each account, you can analyze the efficiency and the profitability of your business.

There are many types of accounts in the Chart of Accounts. The broadest classification of accounts separates them into "permanent", or "Balance Sheet" accounts, and "temporary", or "Income/Expense" (Profit/Loss) accounts. Of course there is nothing temporary about income and expenses; the term "temporary" means that those account balances are summed into a special equity account called "Retained Earnings" at the end of the fiscal year, and then zeroed to begin the new year's accumulations. Permanent accounts, on the other hand, always retain their balances. The importance of temporary accounts is that they allow you to examine your profit (or loss) each month over the fiscal year, so that you can keep an up-to-date picture of your company's financial health.

Balance Sheet accounts can be further classified as "Assets", which are generally tangible, valuable items that your company owns; "Liabilities", which are legal obligations your company owes to its creditors; and "Owners' Equity", which reflects the amounts that various individuals or companies have invested in your business.

When a business first begins, the only equity available is the initial investment made by the owner of the business (the Owner's Equity). As the company grows, it purchases goods, services, supplies, and equipment; these items are necessary to conduct business. In so doing, the company acquires liabilities; the liabilities represent what the company owes its creditors. Most businesses have creditors, and since the creditors have first claim on the company's assets, we come to the basic rule of accounting, which is:

Assets = Liabilities + Owners' Equity

This means that the dollar value of your total assets is equal to the sum of the value of your liabilities and the value of your owners' equity.

Asset accounts are also sometimes referred to as "debit" accounts; liability and equity accounts are also sometimes referred to as "credit" accounts. This simply means that the balance in each type of account is typically either a debit amount (denoted DR) or a credit amount (denoted CR). For ease of recognition, APPX General Ledger assumes that when you enter a positive amount you are entering a debit, and when you enter a negative amount you are entering a credit.

What are debits and credits?

The difference between a debit and a credit is defined only by the type of account each represents. Asset accounts are increased when they are debited; liability and equity accounts are increased when they are credited. This allows the basic account rule (Assets = Liabilities + Owners' Equity) to hold true as you make your daily transaction entries.

Since debits are recorded as positive numbers and credits are recorded as negative numbers in APPX General Ledger, the basic accounting rule can also be stated:

Assets (positive) + Liabilities (negative) + Owner's Equity (negative) = 0

This means that your debits must always be offset by an identical, negative credit amount; otherwise your General Ledger will be "out of balance". Each month as you set out to examine the current activity of your business, you should print the report called "Trial Balance" to make sure that the net sum of your debits and credits is zero.