General Ledger

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Keeping a general ledger is like being the stats from a basketball game: you're tracking every little detail that affects the scoreboard. In this case, you're tracking every detail that affects your financial statements. As you can see on the general ledger sample below, the ledger provides a snapshot of all transactions done for a defined period. The general ledger is made up of your journal entries, which record all business transactions made (e.g. receipts and checks).
1. Purchasing a Cash Register
Debit
Credit
    Cash (Asset)
$2,000
    Fixed Asset (Asset)
$2,000
2. Purchasing Candy on Account to Sell
    Accounts Payable (Liability)
$100
    Inventory (Asset)
$100
3. Selling Meat to Customer on Account
    Accounts Receivable
$30
    Sales (Income)
$30
4. Collecting The Account Receivable
    Accounts Receivable (Asset)
$30
    Cash (Asset)
$30
5. Paying Employees
    Payroll Expense (Expense)
$500
    Cash (Asset)
$500
For every business transaction on the general ledger, there are two offsetting columns. That is, for every debit, an equal credit exists. This makes sense because money will have to travel from one place to another. You'll know you have a financial error somewhere in your records if your books don't balance. The relationship between debits and credits for business transactions are shown in the table below (both tables adapted from Rieva Lesonsky's Start Your Own Business).
Account Type Debit Credit
Assets Increases Decreases
Liability Decreases Increases
Stockholder's Equity Decreases Increases
Income Decreases Increases
Expense Increases Decreases
Keep proofs of all transactions, such as those described in the general ledger sample above. You don't want angry vendors coming after for their dues you've already paid. Worse yet, you don't want to be audited without having these documents.

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Posted on February 18

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