The general ledger is a business-accounting concept that keeps track of the incoming and outgoing money in a company. A general ledger keeps track of four basic financial elements: assets, liabilities, income and expenses. When all these areas of the company’s finance are combined, accountants are able to figure out the net worth (value) of the company.
Assets
Assets are anything the company owns that has value. Real estate and any machinery owned by the company are considered tangible or fixed assets since they’re meant for long-term use. Intangible assets are things such as patents or trademarks. These assets often have somewhat indistinct values since their worth is determined by outside factors.
The final type of assets is a current asset. Current assets are things that are bought by a company and used within the financial year to create a profit. For a furniture manufacturer, current assets are the materials needed to construct furniture.
Liabilities
Liabilities are funds owed by one company to another. These debts are divided into short and long-term liabilities. A company pays off short-term (current) debts within 12 months (their financial year) while long-term debts have a longer payback window.
Income
Income is any money paid to the company resulting from sales or services. In a general ledger, there are usually several different income accounts. This helps companies to track just where their money is coming from. Companies can establish as many or as few income accounts as they want in their general ledger. An electronics company, for example, can set up their general ledger with an income account for each type of electronics they sell (televisions, computers, stereo systems) if they want to keep track of where they make the most money.
Expenses
The two basic types of expense accounts are direct and indirect expenses. Direct expenses are most often found in sales situations. When a company sells a product, the direct expense for the sale is the cost of manufacturing or purchasing the product. So if an electronic store buys a camera for $75 and sells it for $125, their direct expense on that sale is the original $75 that the camera cost. Indirect expenses aren’t assigned to specific transactions. Telephone bills and the rent are calculated on monthly terms and can’t be specifically linked to exact sales.
Retained Earnings
# Within the general ledger, the retained earnings are the value of a company’s income minus its expenses. This value is also referred to as the net profit and so long as this number remains positive (income is higher than expenses) the company is making money.