Ledger: how to keep up with your accounts
Libro Mastro: a name with an archaic flavour that, however, does not refer to any distant era, nor to some mysterious magical world.
On the contrary, the ledger is an instrument used daily in accounting. No reference, therefore, to spells transcribed in massive manuscripts. The only information contained in the ledger is data on the company's economic and financial changes. But let us go into a little more detail.
What is the ledger?
The ledger is an accounting ledger, i.e. one of the main documents of accounting management. It is part of the basic accounting records and has as its objects the income and assets of the company.
In particular, the general ledger contains all of the profit and loss and financial accounts opened or moved by the company during a given financial year. These are reported separately, meaning in separate sections, one for each account. In practice, each profit and loss account corresponds to a financial account.
Profit and loss account and financial account: what are they?
We have spoken of profit and loss accounts and financial accounts. But what are they?
Accounts are generally diagrams in which accounting entries are to be made. They can be of two types:
- Economic accounts(E.C.), i.e. accounts that record economic changes. These can be: revenues, costs, i.e. income objects, or equity, i.e. capital objects (share capital, operating profits, reserves, outstanding losses). Income accounts can be: simple, when they contain single objects, or complex if they contain multiple objects.
- Financial accounts (FC), i.e. accounts that record financial changes. These correspond to: cash inflows or outflows (accounts that are certain, i.e. give rise to an immediate mobilisation of money), receivables and payables (assimilated accounts, in which no immediate mobilisation of money takes place), funds, charges and risks (assumed accounts, which contain objects that are not certain to take place in the future). Unlike economic accounts, financial accounts can only be simple.
What is the purpose of the ledger?
The general ledger is used to record the economic and financial changes of a company during a financial year. These are, in other words, business transactions.
Thus, the general ledger provides a snapshot of the balance and the different accounting elements of a company and, in this way, allows one to reflect on the business transactions undertaken during the financial year in a targeted manner.
Economic and financial changes
We have said that the general ledger records the data contained in the accounts that refer to the company's economic-financial changes.
To be precise, these amount to:
- Positive economic changes, formed by the total of revenues, share capital and operating profits;
- Negative economic changes formed by the set of outstanding costs and losses;
- Positive financial changes, also known as assets, formed by the aggregate of revenues and receivables;
- Negative financial changes, also known as liabilities, formed by the aggregate of expenses, debts, provisions, charges and risks.
When is it mandatory?
The general ledger is not always mandatory. According to the Civil Code (Article 2214), the general ledger is compulsory if the nature and size of the business require it. As a rule, it does not apply to small entrepreneurs.
The tax regulations (Presidential Decree 600/1973, Article 14), on the other hand, require it for all companies in ordinary accounting. Therefore, the ledger will certainly be applied to:
- Capital companies;
- Sole proprietorships and partnerships, if these exceed certain volumes of business.
General ledger vs. journal
The general ledger and the journal are two fundamental accounting records for general bookkeeping. They correspond to separate, but closely interconnected registers.
In fact, the same information is recorded in them, albeit in a different manner, according to the double-entry principle.
→ The ledger records data according to a chronological criterion, i.e. according to the date of creation of the account;
→ The general ledger records information according to a systematic criterion, i.e. according to the reference object. In this case, the reference object is each individual account. In this sense, the ledger can be defined as a systematic entry.
Ledger: structure
In practice, the ledger takes the form of a series of sheets, each of which is headed to a specific object.
The ledger sheets contain all information on assets and liabilities, income and expenditure, in short, on every economic or financial movement of the company. This data is, as we have seen, organised in charts called accounts.
In particular, each account is drawn up in the form of a ledger. The ledger is an accounting statement that contains the transactions of an account. Visually, it is developed in the shape of a T:
- At the top, above the upper part of the letter T, is the header, which accommodates the subject matter of the account;
- In the two sections outlined below, on either side of the T, there are, by natural formation, two columns. In them, on the left-hand side, debits are to be indicated, and on the right-hand side, credits are to be indicated. The section corresponding to the left-hand column is designated " debit", while the section on the right is designated "credit".
- The "debit" column shows how the company's resources are used;
- The "have" column shows the source from which these resources come.
☝ The general ledger is editable: the information in it can be corrected. They must, however, remain clear and legible (Art. 2219 of the Civil Code).
Retention of the general ledger
The general ledger must be kept for at least 10 years after the last entry, even in the event of an interruption in business, in order to allow any tax assessments to run smoothly.
An aid in company accounting management
Although not compulsory, the general ledger is one of the registers most frequently used by accountants on a daily basis.
Why this? Well, because the ledger provides, in effect, an overview of all company movements in a systematic manner. Its high degree of structural organisation makes it possible to monitor business transactions. The ledger serves, therefore, as a good indicator to gain a deeper understanding of business performance.
Article translated from Italian