A general ledger holds the complete set of recorded accounting information on business transactions, and is the direct data source for compiling financial statements. An effective general ledger with properly named and numbered accounts helps maintain an orderly and logical record of account information. A general ledger must be designed to accommodate the needs for additional future ledger accounts. It can sometimes be challenging for a small business to decide on the ledger complexity to accomplish this.
Identifying Ledger Accounts
A small business must appropriately identify the kinds of general ledger accounts it needs to have, depending on the type of business it is in. For example, a retail business may omit the fixed-asset account for plant, equipment and building, a common account for a manufacturing business. However, regardless of the specific accounts chosen, accounts in the general ledger often are in conformity with accounts in the balance sheet and income statement in terms of the listing order and the use of account names. How accounts are listed in the ledger can affect the way they are numbered.
Assigning Account Numbers
To have an effective general ledger, account numbers must be assigned to different ledger accounts in a logical way. Companies usually arrange accounts in the general ledger by first taking up asset accounts, followed by liability and equity accounts, and ending with revenue and expense accounts. Account numbers often are in the form of multiple digits, and for a small business, the length of account numbers can be shorter. Ledger account numbers often designate the first digit as an account identifier for the account group to which similar accounts belong, such as number 1 for all asset accounts and number 2 for all liability accounts and so forth.
Defining Ledger Structure
Depending on the scope of its business activities, a small business needs to properly define the structure of its ledger accounts. A small business may choose a more simple account structure with fewer accounts or a more complex account structure with more accounts. A simple account structure may well accommodate the kinds of business transactions a small business currently has, but creates the needs to name new accounts, potentially requiring account re-numbering throughout the ledger. A complex account structure may have to use longer account numbers, often causing recording errors, and may also leave many accounts unused because of currently limited business transactions.
Adding New Accounts
As a small business grows over time, new accounts in the general ledger may be needed to handle the recording of new business transactions. For example, a business may start borrowing more using different forms of debt to expand its capital investments, and thus will need to add certain new liability accounts to record related transactions. It is beneficial to separate each account by several numbers when initially setting up account structures and assigning account numbers in the general ledger. Thus, when a new account needs to be inserted between two accounts, a spare account number is always available, preventing re-numbering the entire ledger and thus increasing efficiency for the existing ledger.