How to read a general ledger

The general ledger has a section for every account in your chart of accounts. Each section lists the transactions posted to that account, in date order, with a running balance. Reports such as the profit and loss statement, the balance sheet and the trial balance are summaries of these balances.

For a company, the Corporations Act requires written financial records that correctly record and explain its transactions, and its definition of financial records includes documents of prime entry. The ledger is where those transactions come together, so being able to read it is part of being able to explain your own books.

Most ledger reports show each account the same way: an opening balance, one line per transaction and a closing balance. Each line has a date, a reference such as a bill or journal number, a description, the amount in a debit or credit column, and the balance after that line.

For an expense account like this one, the opening balance is the total recorded earlier in the same financial year, so the closing balance is the year to date and the quarter's own cost is the movement between the two. For an asset or liability account, the opening balance is the amount carried forward from the end of the previous period.

Three lines in the example need a closer look.

• The air conditioner service appears twice, with the same reference, date and amount. Compare both lines with the original bill and its item detail: they may be duplicate entries, or separate charges on one bill. Correct a duplicate only after confirming it.
• The laptop sits among tradespeople's bills. It may belong in another account, and how equipment purchases are recorded is a question for your accountant.
• The journal entry reduces the account but says only "Adjustment". A journal should say what it corrects and why, so anyone reading the ledger later can follow it.

None of these would show on the trial balance, which only carries the closing balance. They only show when you read the account itself.

When a figure in a report surprises you, follow it down:

1. Note the account name and the report's date range.
2. Run the ledger for that account over the same dates. For a balance sheet account, match the closing balance to the report; for an income or expense account, match the movement over those dates, the closing balance less the opening balance, unless the report runs from the start of the financial year.
3. Sort or scan the lines for the largest amounts and anything unfamiliar.
4. For each line you question, use its reference to find the bill, invoice, receipt or bank transaction behind it.
5. Check that the document's date, amount and description agree with the line, and that the account suits what was bought or sold.

The ATO's minimum for a record generally includes the date, the amount, a description and the purpose of the transaction. A ledger line that leads to a document with those details can be explained. One that leads nowhere is the first thing to fix.

• The same amount, date and reference twice.
• A regular cost with a month missing, or with one month doubled.
• Lines whose description doesn't fit the account, such as a sale in an expense account.
• An entry and its exact reversal close together, with no note saying why.
• Round-figure journals, which often mark an estimate or a quick fix.
• Transactions dated outside the period you expected, which can mean a wrong date was keyed in.

Some ledger accounts hold totals rather than detail. Accounts receivable usually shows invoices and payments for all customers together, while the breakdown by customer sits in a separate customer list. Accounts payable works the same way for suppliers. These summary accounts are often called control accounts.

At any date, the control account should equal the total of the list behind it. If it doesn't, check for entries posted directly to the control account without the matching customer or supplier detail. Those entries can change the ledger total without updating the detailed balances.

business.gov.au notes that manual bookkeeping uses a series of books or ledger accounts, while software keeps the ledger for you. Either way it is a business record. business.gov.au says most business records need to be kept for 5 years, and company records for 7 years. The Corporations Act sets the company period at 7 years after the transactions the records cover are completed.

If you change software, the ATO expects you to be able to reconstruct your original data. Exporting a full ledger report for each year before you switch keeps the detail readable.