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.

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 subdivision of accounts separates them into “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.

Temporary Accounts

Another subdivision 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.

Financial Statements

This brings us to a very important thing that General Ledger can provide for you: Financial Statements. Financial statements vary depending on how you want your accounting information presented, and what types of analyses you intend to do. In general, however, two financial statements are common. These are the “Balance Sheet”, which presents a summary of your permanent accounts; and the “Income Statement”, which summarizes your temporary accounts and indicates your current profitability. The Income Statement often includes a comparison to budgeted amounts, and is sometimes referred to as the “P & L” (“Profit and Loss”) or the “Income and Expense” statement.

The Income Statement is an analysis of your temporary accounts. These are “Income”, or “Revenues”, which are credit accounts; and “Expenses”, which are debit accounts. On a typical Income Statement the Revenues will be listed first. These itemize the current activity for the goods or services that your business sells. Offset against these are the current Expenses, which include such things as office supplies, monthly insurance premiums, rent, and employees’ wages. The difference between revenues and expenses is called “Current Earnings”. This is a temporary equity account which reflects the current profitability of your company. Everyone hopes that Current Earnings maintains a credit balance, because that means that Revenues are larger than Expenses!

The Balance Sheet summarizes your permanent asset accounts (“Assets”) and your permanent capital accounts (“Liabilities” and “Owner’s Equity”). Asset accounts include long-term assets such as equipment and buildings, and shorter-term or more liquid assets such as cash and accounts receivable (which is the sum of the amounts you have billed your customers but they have not yet paid). Liability accounts include mortgages, taxes owed, and accounts payable (which is the amount you have been billed for goods or services and have not yet paid); and equity accounts include the amounts invested by stockholders and/or the company’s owners.

Another, special type of equity account is called “Retained Earnings’. This account reflects the company’s ongoing profit or loss, summed over all the years that the company has been in business. On your Balance Sheet, the total of all your assets should exactly equal the total of all your liabilities plus your Owners’ Equity (which includes year-to-date Current Earnings).

At the end of each fiscal year, year-to-date Current Earnings (total profit or loss for the year) is added to the Retained Earnings equity account; and then all revenue and expense accounts are zeroed to begin accumulating for the next fiscal year.

Transaction Processing

The most generally accepted method of recording transactions, and keeping them in balance, is called “double-entry bookkeeping”. This is the method used by APPX accounting applications, including General Ledger; therefore, for every debit transaction entry you make, you must also make a corresponding credit entry.

As an example, consider an invoice for a purchase of office supplies for your company. In this example you would debit an expense account called Purchases for the amount of the invoice, and credit the liability account called Accounts Payable for the same amount. Thus the current expense is recorded (for the office supplies) and will be reflected in the next Income Statement; but your liability has also been increased (since you now owe the vendor from whom you purchased the office supplies). In the same manner, when you pay for the office supplies you would debit Accounts Payable (reducing your debt) and credit Cash (also reducing your bank balance). This ensures that the General Ledger is always in balance; in other words, your debits always equal your credits.

In all APPX accounting applications, including General Ledger, your daily transaction entries can be performed using a series of methodical steps. In every application, these steps are basically the same. They are:

• Enter your daily transactions
• Print journals of the transactions; these provide a necessary audit trail
• Post the transactions

Once these steps are performed, you can print reports and view inquiries that will contain up-to-theminute information. Since posting transactions automatically updates the General Ledger, your information will be up-to-date not only in any subsidiary applications you may have, but also in General Ledger.