Concepts

General ledger

The general ledger is the master record of all your business's financial accounts, where every transaction is recorded and from which the profit and loss statement and balance sheet are produced.

The general ledger is the central book of account for a business. Each account in the chart of accounts, such as sales, wages, rent, bank and GST, has its own section in the ledger that records the transactions that affect it. Every transaction is recorded using double-entry bookkeeping, meaning that each entry has an equal and opposite counterpart, so the ledger always balances. The ledger is the foundation for all financial reports.

In a modern small business, the general ledger usually lives inside accounting software and is updated automatically as you enter invoices, bills, bank transactions and journals. You may never look at the raw ledger directly, but reports such as the trial balance, profit and loss statement and balance sheet are all drawn from it. A bookkeeper or accountant may review the ledger to find errors, make adjustments and prepare year-end tax work.

GST accounts in the ledger are especially important for BAS preparation. Typically, there is a GST collected account, which accumulates GST on sales, and a GST paid account, which accumulates GST credits on purchases. The difference between them, adjusted for any other items, forms the net GST amount for the BAS. Checking that the balance of these accounts agrees with your BAS figures is a useful way to catch coding errors.

The ledger also holds control accounts for accounts receivable and accounts payable, along with accounts for PAYG withholding, super liabilities and loans. Journals are used to record items that do not arise from daily transactions, such as depreciation, accruals, prepayments and corrections. Each journal should have a clear description and supporting documentation so that its purpose is understood later.

For record-keeping obligations, you generally need to keep your accounting records and the source documents that support them, such as invoices and bank statements, for five years. Electronic records are acceptable if they are readable and can be provided to the ATO when needed. Backing up the ledger and keeping an audit trail of changes are good practices, especially if multiple people can enter data.

A common misunderstanding is believing the ledger is only for accountants. In fact, anyone who understands their ledger can see where money is going. Another is allowing the ledger to fall behind and then trying to reconstruct a year at tax time. Regular reconciliation and reviews of the ledger make BAS preparation faster and more accurate. This is general information only, so confirm how this applies to you with the ATO or a registered tax professional.

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