In construction, a “ledger” can refer to a horizontal support installed under the end of a joist or other structural component — but that’s not what we’re talking about here. In construction accounting, a general ledger does act as a sort of support — a support to the financial health of a construction business.
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What is a general ledger?
The general ledger is defined as a record of the financial transactions of a company. It provides a way to categorize transactions so that similar ones can then be summarized in the financial statements.
The ledger is broken up into separate accounts that help categorize transactions. You can think of these accounts as pockets or folders that collect amounts, and then report the totals at the end of a period.
Accounting follows what is called a double-entry system. Each transaction affects at least two ledger accounts and the activity for a transaction has to be balanced. Amounts are added or subtracted from each account using debits and credits.
The structure of the general ledger provides the framework for the company’s financial statements. The accounts in the ledger are ordered in a particular way that mirrors how they are presented on the statements. Generally, accounts are ordered to begin with the balance sheet and then proceed to the income statement.
How is a general ledger used in construction accounting?
Transactions from accounts payable, accounts receivable, and payroll affect the general ledger as they are entered into the accounting system. As mentioned above, each transaction affects at least two accounts and is balanced in its debits and credits. This activity feeds the general ledger accounts as each transaction is processed.
In construction, many companies add an additional layer of tracking by incorporating job costing into their accounting. This means each transaction also gets categorized by project, phase, or cost code. This doesn’t change the general ledger portion of the transaction, it’s just added on top.
It’s often necessary to move amounts or transactions from one general ledger account to another. This may be done because of errors or in order to record internal transactions that don’t affect accounts payable, accounts receivable, or payroll. These correcting transactions are called journal entries and require the same double-entry method as any other transaction.
Why you should use a construction general ledger
Some companies, when they’re small, can record all their transactions in a simple spreadsheet. But as your company grows and begins to include things like payroll, it becomes easier and more accurate to do things with accounting software.
Most accounting software will insist that you develop a general ledger before you start entering transactions.
Having a general ledger is important because:
- It provides an organized and accurate record of all financial transactions
- It helps you compile a trial balance, which is a list of all the general ledger accounts with their current balance, so your books balance (debits and credits must be equal in the double-entry system)
- It makes filing tax returns easy because you have your expenses and income categorized in one place
- It reports real revenue and expenses so that you can stay on top of spending
- It helps you spot unusual transactions immediately
- It helps you identify (and stop) fraud
- It aids in compiling key financial statements which are crucial for evaluating your profitability, liquidity, and overall financial health. These include cash flow statements, the income statement, and the balance sheet.
Sample construction ledger accounts
General ledger accounts are organized into what’s called a chart of accounts. This is a list of all the ledger accounts, their description, and an identifying account number to make data entry easier.
There are five types of general ledger accounts: assets, expenses, liabilities, equity, and income/revenue.
Each of these will have at least one account in the ledger, depending on the structure of the company and how detailed the records are.
Here are some common balance sheet accounts and how they are arranged in the general ledger.
- Asset accounts: Cash (bank account), Accounts Receivable, Inventory, Land, and Equipment
- Liability accounts: Notes Payable, Accounts Payable, Accrued Expenses Payable, and Customer Deposits
- Owners’ equity accounts: Retained Earnings and Accumulated Other Income
Here are some income statement accounts and how they are arranged.
- Revenue accounts: Sales, Service Fee, and Interest Revenues
- Operating expense accounts: Cost of Goods Sold, Payroll Expense, Rent Expense, Office Expense and Advertising Expense
- Nonoperating or other income accounts: Gain on Sale of Assets, Interest Expense, and Loss on Disposal of Assets
To see samples of a construction general ledger chart of accounts, check out “How to Create a Chart of Accounts in Construction” — it includes some industry-standard accounts that can help you set up your general ledger.
The construction ledger supports the company
The general ledger provides the backbone for a construction company’s accounting system and financial statements. It’s how financial transactions are categorized and determines what type of costs and income the company is tracking.
It’s best to start out with a fairly simple account structure, and then add accounts as needed. You should also consult with your accountant or CPA so you know what you should be tracking and how much detail will be needed come tax time.