Ledger: how to keep up with your accounts
Ledger: a name with an archaic flavor that, however, does not refer to any distant era or some mysterious magical world.
On the contrary, the ledger is an instrument used daily in accounting entries. No reference, therefore, to spells transcribed in massive manuscripts. The only information contained in the ledger is data on the company's economic and financial changes. But let us go into a little more detail.
What is the general ledger?
The general ledger is an accounting ledger, which is one of the main documents of accounting management. It is part of the basic accounting records and has as its objects the income and assets of the company.
Specifically, the general ledger contains all of the income and expense and financial accounts opened or moved by the company during a given fiscal year. These are reported separately, in the sense in separate sections, one for each account. In practice, each income statement corresponds to a financial account.
Profit and loss account and financial account: what are they?
We have talked about profit and loss accounts and financial accounts. But what are they?
Accounts are generally diagrams in which accounting entries are to be made. They can be of two types:
- Income and expense accounts (E.C.), which are accounts that record economic changes. These can be equivalent to: revenues, expenses, i.e., income objects, or equity, i.e., capital objects (share capital, operating profits, reserves, outstanding losses). Income statements can be: simple, when they contain single objects, or complex if they contain multiple objects.
- Financial accounts(P.F.), or accounts that record financial changes. These correspond to: cash inflows or outflows (accounts that are certain, i.e., give rise to an immediate mobilization of money), receivables and payables (assimilated accounts, in which an immediate mobilization of money does not take place), and funds, charges and risks (assumed accounts, which contain objects that are not certain to take place in the future). Unlike income accounts, financial accounts can only be simple.
What is the purpose of the general ledger?
The general ledger is used to make accounting records of the economic and financial changes of a business during a financial year. These are, in other words, business transactions.
So, the general ledger provides a subjective picture of the balance and different accounting elements of a business and, in this way, allows one to reflect on the business transactions undertaken during the fiscal year in a focused manner.
Economic and financial changes
We have said that the general ledger records data contained in accounts that refer to the company's economic-financial changes.
To be precise, these amount to:
- Positive economic changes formed by the total of revenues, share capital and operating profits;
- Negative economic changes formed by the set of outstanding costs and losses;
- Positive financial changes, also known as assets, formed by the set of revenues and receivables;
- Negative financial changes, also known as liabilities, formed by the set of expenses, debts, provisions, charges and risks.
When is it mandatory?
The general ledger is not always mandatory. According to the Civil Code (Article 2214), the general ledger is mandatory if the nature and size of the business requires it. In fact, it does not normally apply to small entrepreneurs.
Tax regulations (Presidential Decree 600/1973, Article 14), on the other hand, require it for all businesses in ordinary accounting. Thus, the general ledger will definitely be applied to:
- Corporations;
- Sole proprietorships and partnerships, if they exceed certain volumes of business.
General ledger vs. journal book
The general ledger and the journal are two basic accounting records for general bookkeeping. They correspond to separate but closely related ledgers.
In fact, the same information is recorded in them, albeit in a different manner, on a double-entry basis.
→ The ledger records data according to a chronological criterion, that is, according to the date of account creation;
→ The general ledger records information according to a systematic criterion, that is, according to the reference object. In this case, the reference object is each individual account. In this sense, the ledger can be defined as a systematic record.
Ledger: structure
In practice, the ledger is presented as a series of tabs, each of which is headed to a particular object.
The ledger tabs contain all the information on assets and liabilities, income and expenses, in short, of every economic or financial movement of the company. These data are, as seen, organized into schedules called accounts.
Specifically, each account is prepared in the form of a ledger. The ledger is accounting statement that accommodates the transactions of an account. Visually, it is developed in the shape of a T:
- At the top, above the top of the letter T, is the header, which accommodates the subject of the account;
- In the two sections outlined below, on either side of the T, there are, by natural formation, two columns. In them, on the left, debits are to be shown, and on the right, credits are to be shown. The section corresponding to the left column is designated as "debit," while the one on the right, is referred to as "debit."
- The "debit" column reports how the company's resources are used;
- The "have" column reports the source from which these resources come.
☝ The general ledger is editable: the information in it can be corrected. They must, however, remain clear and legible (Article 2219 of the Civil Code).
Retention of the general ledger
The general ledger should be kept for at least 10 years after the last entry, even if the business is discontinued, so that any tax assessments can be carried out smoothly.
An aid in the accounting management of the company
Although not mandatory, the general ledger corresponds to one of the most frequently used records by accountants on a daily basis.
Why this? Well, because the ledger provides, in effect, an overview of all business movements in a systematic way. Its high degrees of structural organization make it possible to monitor business transactions. The ledger serves, therefore, as a good indicator for getting to a deeper understanding of business performance.
Article translated from Italian