Wise Accounts Blog

A general ledger is a book where people record their accounting information according to the bookkeeping principle of double-entry. Fear not, it is not as complicated as it sounds...

Counting your beans is made easier with computers but we can also lose track of the underlying idea. The reason for writing entries twice is primarily for error checking and also because a transaction can be looked at in two possible ways: where the money comes from or where it goes to.

If you depreciate your car by say 10% annually (the car is deemed to become worthless after 10 years) then you would decrease the car's value by 10% in the fixed assets account. That's the first entry for that transaction. The second (balancing) entry would be to increase the depreciation expense account by the same (opposite) amount.

Accounts are arranged into groups such as revenue, cost of income, expenses, current assets (cash, bank accounts, tradable investments), current liabilities (credit cards, personal loans), fixed assets (car, furniture, property), long-term liabilities (mortgage).

Here is a free tip: to spot a data entry error, check if your general ledger is out of balance by a multiple of nine. Then you know someone swapped two digits when typing an amount. For instance you types 43 on one side of the ledger but 34 on the other side. The difference is 43 - 34 = 9. Your ledger would be out of wack by an amount of 9 dollars!

Accounts are again separated into 4 main groups: income and expenses which make up the profit and loss statement. Assets and liabilities make up the balance sheet. What is so clever about that? Income and expenses accounts are reset every period (month, year, whatever your accounting period is) while assets and liabilities are carried over from period to period. The idea here is that we want to compare period by period whether you are generating more cash that you are burning cash. But your net worth (the difference between what you own and what you owe) compounds from period to period.

As far as revenues and outgoings you get a new clean slate each period. On the other hand your wealth today is the result of what you accumulated less what you borrowed since you've been in business.

There are also other ledgers like the sales ledger (accounts receivable), the purchasing ledger (accounts payable), the branch ledger (accounting for each subsidiary and then consolidation into the head office as a group), the payroll ledger (wages plus payment made on behalf of workers).

Add comment