Categories
Conceptual General

A General Ledger : Understanding the Ledger

What is a general ledger and why is it important? To find out read on!

What is a general ledger? A general ledger is a log of all the transactions relating to assets, liabilities, owners’ equity, revenue and expenses. It’s how a company can tell if it’s profitable or it’s taking a loss. In the US, this is the most common way to track the financials.

To understand how a general ledger works, you must understand double entry bookkeeping. So, what is double entry bookkeeping? I’m glad you asked. Imagine you have a company and your first customer paid you $1000. To record this, you add this transaction to the general ledger. Two entries made: a debit, increasing the value of your assets in your cash account and a credit, decreasing the value of the revenue (money given to you by your customer payment). Think of the cash account as an internal account, meaning an account that you track the debits (increasing in value) and credits (decreasing in value). The revenue account is an external account. Meaning you only track the credit entries. External accounts don’t impact your business. They merely tell you where the money is coming from and where it’s going.

Here is a visual of our first customers payment.

If the sum of the debit column and the sum of the credit column don’t equal each other, then there is an error in the general ledger. When both sides equal each other the books are said to be balanced. You want balanced books.

Let’s look at a slightly more complex example.

You receive two bills: water and electric, both for $50. You pay them using part of the cash in your cash account. The current balance is $1000. What entries are needed? Take your time. I’ll wait.

Four entries are added to the general ledger: two credit entries for cash and one entry for each the water and electric accounts. Notice the cash entries are for credits.

For bonus, how would we calculate the remaining balance of the cash account? Take your time. Again, I’ll wait for you.

To get the remaining balance we need to identify each cash entry.

To get the balance of the Cash account we do the same thing we did to balance the books, but this time we only look at the cash account. We take the sum of the debit column for the cash account and the sum of the Credit column for the cash account and subtract them from each other. The remaining value is the balance of the cash account.

And that folks, is the basics of a general ledger and double entry bookkeeping. I hope you see the importance of this approach. As it give you the ability to quicking see if there are errors in your books. You have high fidelity in tracking payments and revenues.

This is just the tip of the iceberg in accounting. If you’d like to dive deeper into accounting, have a look at the accounting equation: Assets = Liabilities + Owner’s Equity.

Hopefully this post has given you a basic understanding of what a general ledger is and how double-entry bookkeeping works. In the next post I’ll go into how to implement a general ledger in C#.

Categories
Code

Proofing a Concept and Growing the Code

In a recent conversation, a friend mentioned he creates proof of concepts and then discards them after testing their viability. I’ve done the same in the past. This time it didn’t feel right. I cringed when he said he threw away to the code. Maybe my days as a business owner has turned me into a froogle goat, but it felt like he was throwing away value.

Why don’t we continue forward with a proof of concept?

Generally when I think of a proof of concept its hastily assembled. Many of the “best practices” are short-cutted if not downright ignored. The goal is to test the feasibility an idea. At some point you’ll realize if the solution will work. Then you’ll decide if it’s time to walk away from the idea and ditch the proof of concept or move forward with the idea. If you move forward with the idea, why not keep coding and turn the proof of concept into the real deal?

I’ll be honest here, it seems ridiculous that you’d create a solution and then throw it away just to create it again. That’s like poorly painting an entire house just to see if you like the color. “Yep, the color is good. Let’s paint the house for reals this time and this time we’ll do a good job.

There is another way. Evolve the code. Add in the missing infrastructure. This has the possibility of growing into a long term healthy solution.

Walking away from a proof of concept costs you value (time and money) that might otherwise be captured. Even if you don’t capture 100%, you’ll still be better off than just chucking everything and walking away. So next time, give it a try. See if you can morph a proof of concept into a sustainable project. I think you might be surprised at the end result.