Understanding a General Ledger System

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This General Ledger System posts almost all Financial Transactions automatically - in the background with no procedural changes - as Sales, Receipts, Bills, Payments and Inventory related transactions are entered in the Accounts Receivable, Accounts Payable and Inventory Tracking & Job Costing modules.

•	You do not have to be a CPA to use this General Ledger module, but you may need to confirm some information with that person as you Setup this General Ledger System.

•	Although this Understanding a General Ledger System chapter is not intended to be a course in Accounting, it will discuss some important Accounting Concepts.

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Those person(s) that are using the Accounts Receivable, Accounts Payable and/or Inventory Tracking & Job Costing modules do not really need to know this information, but, the person who is actually setting up the General Ledger System must have a working knowledge of the Accounting Concepts presented below.

□	Accounting Terms and Types of Reports - There are certain terms that, if you understand them, will make starting this General Ledger System easier:

•	Chart of Accounts - This is a list of General Ledger Accounts divided by the Type of Transactions that are entered, and sometimes organized further by Account Groups within each Transaction Type.

•	It is simply a list of "Accounts" identified by an Account Name (called its Title), and a number (the Account Number) that will "hold" the sum total of the dollar values (referred to as the Account's Balance) posted to them.

•	General Ledger Group IDs - General Ledger Groups are used to sub-divide the five basic Type of Transactions ( (i.e., Assets, Liabilities, Equity, Sales and Expenses) into additional sub-groups.

•	Trial Balance - A report that provides a preliminary view of the balance in all General Ledger Accounts to Confirm that your General Ledger is in balance.

•	In Balance = The Total Value posted to all of the Credit Accounts must equal the Total Value posted to all of the Debit Accounts.

•	Profit & Loss Statement (sometimes referred to as an Income Statement) provides a list of Revenue Accounts with a subtotal, then Expense Accounts with a subtotal, and the net difference between them (if your Revenues are greater than your Expenses, there is a Profit, otherwise these is a Loss).

•	Balance Sheet - Provides a list of Asset Accounts with a subtotal, then Liability Accounts with a subtotal, and (what is actually) the net difference between them which is the Company's (Stockholders) Equity.

•	General Journal - A process wherein a special entries may be posted directly into the General Ledger without using the Accounts Receivable, Accounts Payable and/or Inventory Tracking & Job Costing modules.

□	Understanding Debits & Credits - Perhaps you have heard this expression before:

•	"Debits must equal Credits"

•	The sum of all Debit entries must equal the sum of all Credit entries.

•	The rules for Debits & Credits (as outlined below) are Rules.

•	Just remember them - don't question them.

•	This may be the most difficult concept for you to understand when first getting involved with an Accounting System - manual or automated.

•	And this is because the Term "Debits and Credits" is actually used to describe two very different things.

•	The two definitions for Debits and Credits are stated simply and clearly below.

1.	An Account Type Classification: (a noun) - A classification for each Type of Account ( (i.e., Assets, Liabilities, Equity, Sales and Expenses)

2.	An Action on an Account Type: (a verb) - The action of actually posting Transaction Amounts to one of those Type of Accounts.

•	Continuing with the "Debits must equal Credits" issue, the sum of all Debit entries must equal the sum of all Credit entries.

▪	This means that you can never make one entry, you will always make a minimum of two (a Debit entry and a Credit entry of the same value) when creating a Financial Transaction.

▪	By internally obeying this "Debits must equal Credits" methodology, the General Ledger automatically stays "in-balance".

▪	This is what is known as "Double Entry Bookkeeping" (see below and that related chapter for detailed information).

□	Double Entry Bookkeeping

•	The sum of all Debit entries must equal the sum of all Credit entries.

•	Double Entry Bookkeeping is simply a method used to make sure your "books" stay properly balanced at all times.

•	It assumes that there are two columns of values (monies) - each with the same total value.

•	That value set says that your Assets and your Expenses, when added together, will equal the same total as when your Liabilities, Sales and Equity accounts are added together.

•	So, if that is true, whenever you make an entry into this two column set of values, if you add to one, you must add to the other - and visa versa - if you subtract from one you must subtract from the other.

•	Debits and Credits - The column on the left of a Double Entry Bookkeeping journal is called the Debit column, the column on the right is called the Credit column.

□	What's Next?

•	Read the Accounting Terminology, Understanding Debits & Credits, and Double Entry Bookkeeping chapters for more detailed information about the concepts presented above.

•	Then Read the General Ledger Setup Overview chapter.

•	Finally, Complete all of the recommended Maintenance Entries.