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Understanding General Ledgers: How Do You Read Them?

Understanding General Ledgers: How Do You Read Them?

A general ledger is a central repository in an accounting system that captures and organizes all transactions. The general ledger also serves as a comprehensive record of revenues and expenses, providing a detailed overview of the company’s financial activities.

Knowing how to read a general ledger allows companies to improve their understanding of finances, decision-making capabilities, and reporting and uphold transparency and compliance in financial management.

While there are many essential elements within the general ledger to familiarize yourself with, you can start by learning what ledger accounts are since these accounts make up the bulk of every ledger.

What are ledger accounts?

Ledger accounts are individual accounts within the general ledger that record and track a business’s transactions.

Ledger accounts serve as the building blocks of the ledger system by providing detailed financial records and allowing businesses to track individual transactions, monitor account balances, and generate accurate financial statements.

Now that you’re familiar with ledger accounts and their importance, you can learn how to read a general ledger.

How to read a general ledger

Before reading a general ledger, you should review its structure and standard terminology for a more thorough understanding of this data.

Here are six common terms to familiarize yourself with prior to reading the general ledger:

  1. Chart of accounts (COA): The chart of accounts establishes the framework for organizing a business’s financial transactions and is typically found at the beginning of the general ledger, listing all the accounts used. The COA is organized by categories such as assets, liabilities, equity, revenue, and expenses, with each amount being assigned a unique account number and name.
  2. Date column: The first column in the ledger usually contains the date of each transaction. Transactions are recorded chronologically, with the most recent ones at the bottom.
  3. Debit and credit columns: The general ledger follows the double-entry accounting system, so each transaction has a debit and credit entry. Debits are recorded on the left side of the ledger, while credits are recorded on the right side.
  4. Running balance columns: Some general ledgers include running balance columns to show the cumulative balance of each amount after each transaction. This helps quickly assess the current balance of an account.
  5. Reference document numbers: A column for reference or document numbers may be included to link transactions to supporting documents such as invoices, receipts, or purchase orders.
  6. Closing entries: At the end of the accounting period, closing entries may be recorded to transfer the balances of temporary accounts to permanent accounts.

Now that you’re aware of the different terms and sections involved, you can start reading the general ledger by reviewing the COA to understand the structure and categories of accounts used by the business.

Next, scan the transactions chronologically, paying attention to the dates, descriptions, debit and credit amounts, and running balances or reference numbers. This will give you a comprehensive view of the business’s financial activity over a specific period.

Knowing how to read a general ledger is imperative for tracking financial activity, but a reliable payment processing platform can also simplify the process of tracking your finances.

Simplify your general ledger with EBizCharge

Companies can gain valuable insights into their financial standing by reading a general ledger effectively. Thankfully, innovative solutions like EBizCharge can streamline this process even further.

EBizCharge’s seamless accounting and ERP integrations enhance and simplify payment processing tasks, reduce manual errors, and facilitate more accurate financial data by automatically recording transactions in real time in the general ledger.

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