General Ledger and Accounting Principles

General Ledger

The General Ledger is a tool for organising, collating and reporting information about your business and its operations. It allows you to determine through analysis:

• firstly whether your business is profitable
• secondly whether it can sustain itself financially, and
• finally to place a monetary value on the business as a whole.

A General Ledger uses accounting principles and techniques to sort, arrange and report the data it contains. These fundamentals are affected by the needs of the end users and the information they intend to extract and report from the ledger. Internal management may wish to see their sales organised and reported by product or department. The Australian Taxation Office may wish to see the costs and expenses of the business arranged for deductibility or specific tax treatment. A financial institution may wish to see details of income and expenses specific to its industry reported in separate categories. Your General Ledger and its setup can be affected by all these considerations.

Essentially, a General Ledger is the foundation on which your business is assessed, whether it be internally or externally. Ensuring you get the most out of this powerful reporting tool depends upon:

• correctly defining the needs of its users
• an adequate level of knowledge and understanding of accounting principles and techniques
• proficient internal usage, procedures and controls
• consistent verification and reconciliation of data
• a basic understanding of the elements and formats of financial reporting.

Many users - particularly those without accounting experience or knowledge - view the General Ledger as a daunting and complicated system. The basic foundations of the General Ledger itself are simple and uniform. However, the complexity of variables mentioned above that affect its usage and setup are generally the factors that lead many to draw the conclusion that it is a complicated and difficult system to manage and use.

For those users who have not used a General Ledger before, it is like learning to drive a car. You need to learn the rules of the road before you can get behind the wheel and start your hands-on training. Without this knowledge, you may become lost, place yourself in danger or make costly mistakes. The same is true of the General Ledger - you must understand the rules and principles before you can learn to drive.

Once you graduate to physically driving a car, you need to learn the basic functions of the car and what it can do. At this point, you need to consciously think about and concentrate on the rules of the road, as well as your ability to drive the car properly. This usually means you need to take your time and travel slowly until you feel confident and have gained enough practice and experience to drive unmonitored. Eventually, the knowledge and skills become automatic behaviour and response. At this point, you begin to develop a more acute and refined sense of the road and its dangers. Your judgement and skill increases with experience, practice and time.

While driving a car is completely different from using a General Ledger, it still provides a useful analogy. The rules of the road are the general accounting principles and knowledge.The car is the General Ledger and its processes. Just as a car has simple mechanisms and principles that make it drive, so too does the General Ledger. Once you know how to drive and you understand the rules and factors that affect your driving, your ability, knowledge and efficiency evolve naturally with time, patience and experience.