General ledger

What is the general ledger?

In financial accounting, a distinction is made between at least two ledgers. While the basic ledger records all business transactions in chronological order, the general ledger assigns all entries to specific G/L accounts. These two ledgers are the minimum requirement for orderly accounting. This is why it is also referred to as double-entry bookkeeping. In addition, there are also various sub-ledgers that serve as explanations of certain general ledger accounts.

In the following, we would like to explain the general ledger in more detail in an overall context. After all, a well-managed general ledger only works accordingly in interaction with the other ledgers, that have already be mentioned.

The general ledger – a classification

The receipts

The recording of all receipts forms the basis for the allocation and posting of amounts to specific accounts. This includes, for example, all outgoing invoices, incoming invoices, cash vouchers and bank statements.

The land register

On this basis, all business transactions are recorded in chronological order. These include opening entries, current entries, preparatory closing entries and the closing entries themselves. These are transferred to the land register, also called journal or diary.

The general ledger

A company’s controlling is only complete with the general ledger. After a temporal allocation has already taken place, the general ledger is concerned with the factual allocation of all business transactions recorded in the land register.

The subsidiary ledgers

In order to be able to make accruals and deferrals and to have a better overview of individual items in the general ledger, there are also so-called sub-ledgers. Examples include the payroll ledger, the investment ledger, the current account ledger, the cash ledger and the outgoing invoice ledger.

What is the importance of the general ledger for controlling?

In Controlling, all elements of an accounting system coincide. The chart of accounts is created and all business transactions and their postings and accounts are monitored here. An accounting department (EDP) working with a professional accounting program will probably have little to do with the term general ledger, since the general ledger accounts are created automatically by the system on the basis of the entries in the land register. Nevertheless, it is important to understand the principle behind it.

For example, the legislator stipulates that the general ledger takes into account the principle of closeness. This simply means that there must be a debit/credit balance. That is, the sum of the debit items must equal the sum of the credit items.

At the end of an accounting period (e.g. a fiscal year), the profit and loss statement (P&L) and the closing balance sheet are due. The basis for this is the general ledger, which is automatically created by an accounting program or tool.

What does the general ledger mean for the subscription economy?

The relationship with subscription customers is essentially based on constant change. A dynamic business model must therefore also be reflected in the accounting. After all, a company with a subscription business model does not only want to establish flexible billing modalities, but also to offer new services to the customer in a barrier-free and simple way in order to maximize profit.

In short, the world of controlling becomes more and more complex with each new subscription relationship and its ongoing changes. This makes it all the more important to have an accounting program and an overall system that is able to handle complex bookkeeping and at the same time provide customers with easily comprehensible individual statements and info. And of course, in the end, the balance sheet must also be correct, which cannot be obtained with a simple Excel list.

Another important issue in the Subscription Economy is accrual. For example, the timing of due dates rarely coincides with that of the service provided. This is the nature of subscriptions and it is therefore all the more important that this requirement manifests itself in the form of an accurately maintained general ledger.

Conclusion: The main thing is to get the numbers right

A changeable business world such as the Subscription Economy is also subject to dynamic requirements and needs special planning. The general ledger, or accounting in general, must meet these requirements at all times. Developing an understanding of basic accounting principles is therefore essential, especially for subscription companies.

A big advantage is that nowadays the important accounting steps are taken over by accounting programs and you don’t have to rely on an Excel tool for important key figures anymore.