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uilding a business is a lot of work. As an entrepreneur, you must make an array of important financial decisions to ensure your business is healthy and performant.
To run your business smoothly, it’s crucial to have a working understanding of your company's assets, liabilities, revenues, debts, and expenses. The ideal tool for that is a general ledger, which enables you to track those metrics and provides a baseline for your financial reporting.
What is a general ledger?
A general ledger (GL), also known as a general journal, is a written record of a company's financial life—whether it's a physical document or a digital one. It contains the information that's needed to produce financial statements about a company, from balance sheets to income statements, cash flow analyses, and more.
Its role in accounting
A general ledger serves as a central repository for accounting information so you can track your financial performance and produce detailed reports.
This makes it an essential tool when it comes to accounting practices, revealing key insights about the reasons for profits or losses.
Financial data tracked in a general ledger
The primary financial data that a general ledger tracks includes:
- Revenue
- Expenses
- Assets
- Liabilities
- Net assets
A general ledger includes a lot of information, but sub-ledgers help you organize your transactions into sub-categories—such as available cash, accounts receivable, accounts payable, and sales.
The larger the company, the more categories and accounts a general ledger might contain.
Benefits of using a general ledger
A general ledger makes it possible to oversee the financial health of your company, which in turn informs your decision-making and strategy. Any major decision, big or small, should unfold with key insights from the general ledger. For instance, your general ledger can help you decide whether your company is ready for a critical pivot, such as getting rid of a product line. In that way, a general ledger can become a silent business advisor of sorts. Here are a few specific benefits of using a general ledger:
Helps with financial management
By allowing you to categorize and track expenses, a general ledger makes it possible to have both a granular and a big-picture view of your finances. Not only does this make reporting easier, but it also aids in decision-making. You can drill down on your company's financial successes and shortcomings and strategize on how to tighten the belt or where to invest further.
Provides accurate financial information
Because a general ledger is made up of sub-ledgers, your data will be more organized and error-free. You can track sub-ledger transactions on a daily, weekly, or monthly basis, allowing you to accurately monitor your financial performance.
Supports a company's decision-making processes
At multiple points in the life of your business, you'll need to make decisions about product development, real estate, personnel management, and much more. A general ledger gives you the financial data and insights needed to make informed choices. After categorizing both big and small expenses and reviewing your company's financial trajectory, you'll be better prepared to drive business growth.
Facilitates compliance with regulations and taxes
If your company is ever audited, a general ledger will provide easy, quick access to high-level information for compliance, such as balances from key financial statements. At the same time, it will give you and authorities a trail of breadcrumbs for any number that needs to be confirmed, such as all of the noted transactions that led to a particular balance.
How to develop a general ledger
Next, let's take a look at how a general ledger is put together.
Steps to setting up a general ledger
First, decide whether you want to keep a handwritten ledger or use a software-based template. If you prefer a software solution, do your research and figure out which one best fits your business. That could be Intuit QuickBooks, NetSuite, FreshBooks, or another solution, depending on the industry you're in and the current needs of your company.
Next, add your company’s financial accounts, using columns to categorize expenses and lines to note the cost and purpose of each.
Then set up the five primary categories in the general ledger, which are:
- Assets: resources that offer the business tangible or future value
- Liabilities: obligations, like debts that you owe or will owe, and associated risks
- Net assets: assets that your company holds once liabilities are accounted for
- Revenues: money flowing into your company
- Expenses: costs that your company incurs as part of doing business
Remember that you'll want to record every relevant transaction that your company completes. Stay vigilant about logging expenses regularly on the cadence you've established for your business.
Common mistakes to avoid
Make sure you don't fall out of sync with your ledger, even during high-intensity periods for your business.
You'll also want to be vigilant about who has access to your general ledger—the more cooks you invite into that kitchen, the more likely it is that data could be mishandled. Typically, managers and the accounting team have primary access.
Takeaways
For any business, big or small, a general ledger can provide a refuge—a port in the storm while navigating a sea of expenses and balancing every cost incurred against income. A general ledger allows you to track assets, liabilities, owners’ equity, revenues, and expenses in a way that will roll up to the largest-scale view or drill down to the smallest, most minute detail. It can be helpful in guiding your decisions and communicating the health of your business to staff, lenders, investors, and auditors.
If you’re having trouble tracking your transactions properly, Novo can help. With a Novo business checking account, you can automatically sync your transactions with your accounting software. Learn more about how we can help you better manage your finances.
Novo Platform Inc. strives to provide accurate information but cannot guarantee that this content is correct, complete, or up-to-date. This page is for informational purposes only and is not financial or legal advice nor an endorsement of any third-party products or services. All products and services are presented without warranty. Novo Platform Inc. does not provide any financial or legal advice, and you should consult your own financial, legal, or tax advisors.
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