The concept of creating a general ledger for the purpose of building a dealership's financial statements may be as simple or as complicated as you and your accountant wish to make it. The most logical way to approach this subject is to build a General Ledger Chart of Accounts that descriptively represents the way money and events actually flow in and out of your dealership. Events such as sales should be recognized and separated into one or more meaningful categories so you can separately identify the different kinds of sales that combined to create your month's business. Creating sales categories such as retail sales, as opposed to wholesale sales, can give you a good idea of what the overall personality and mixture of your dealership is. But, within each of these sales categories there may be a number of other minor categories you also want to keep track of, such as Notary and handling, Dealer Get-ready, License and Transfer, Insurance and Interest. Just as there are a number of categories of sales, there are also a number of costs that are directly influenced by your sales. These include costs such as the value of Inventory and Improvements Sold, and the amount of Commissions you paid on these sales. By combining current sales and cost-of-sales you will arrive at your net income for the period. Then, if you have recorded your operating expenses such as rent, telephone, payroll, office supplies and so forth, you can subtract them from your net income and arrive at a final profit or loss on your operations. It does not take a genius to recognize that multiple categories of sales income exist and so do multiple categories of expenses. However, it does take a reasonable amount of intelligence to decide just how much information you need to know without making your financial statements too cluttered and cumbersome or too skimpy. A trained Automotive CPA or accountant can often mean the difference between too much and too little financial information.

In a dealership, events occur that on the surface look straightforward and simple. For example, when a vehicle is sold, the sales journal shows a downpayment as a part of the sale and in your mind, it is "money in the bank". But, in truth, it is really not something you would want to show in your ledger as cash in the bank until you physically make the deposit into your bank. So, you would establish one or more clearing accounts to temporarily record money that is reported as collected through a sales transaction, but has not yet been physically deposited into a bank. Rather than allowing the sales transaction to show that the money was deposited, it should be recorded into an "undeposited funds" account (debit) until an actual bank deposit is made. Then, when the money is physically deposited in the bank, an offset (credit) must be made to get rid of the entry you temporarily made in the "undeposited funds" account. As you can see, an "undeposited funds" account or a clearing account as it is sometimes called is simply a temporary resting place for items to be recorded and held until they are reconciled by a final action. At the end of each month, if a balance remains in the "undeposited funds" account, it indicates that some money may not have been deposited in the bank. This could represent many possible sources of error, including forgetfulness, carelessness, and theft. Other clearing accounts may be used for items such as inventory additions, inventory improvements, drafts and floorplans.

In a modern day set of books, all financial entries are made using a technique known as "double entry" bookkeeping. This means that for each positive entry (debit) in your ledger there are one or more negative entries (credits). If you subtract all of the negative entries from all of the positive entries, the result will be equal to zero. This is the mathematical way to say that your books are in balance. For the sake of simplicity, all retail and wholesale sales may be recorded as credits to income, and their offsets become debits to Accounts Receivable. All cash received on a sale is then directly deposited into the bank and its offset is a credit to accounts receivable without regard to whether the sale was cash or A/R. If the sale was for cash, it will be posted "in and out" of accounts receivable immediately without you having to think about any special or separate handling techniques to differentiate between cash and A/R. A sale with no offsetting cash collection entry accompanying it is automatically an Accounts Receivable sale. You don't even have to think about how to handle it, it handles itself. Then, when later payments are received, they are simply debits to the bank account and credits to Accounts Receivable.

By recording your daily financial transactions in your general ledger you will be able to produce reports for yourself and those who have an interest in your success or failure such as financial backers and bankers. A natural byproduct of a general ledger is the ability to produce reports such as Balance Sheets and Income Statements. The one tells your accumulated net worth as a business and the other tells your profitability for the current month and year-to-date. Between them, these two reports are the most important financial documents you will need. If they are properly set-up and accurately accounted for each month, they will make you look much more professional and may even encourage others to make investments or loans to help you grow even more successful.

Most of the information that any businessman requires to run his operations intelligently from day to day and to plan for future events should be available to him through his accounting records. Although your accountant may be available to offer direction and information, a successful manager should have sufficient knowledge of his record keeping system to be able to discover for himself additional insightful information that can direct him to better decision making. The following are definitions that may assist in understanding some of the vocabulary of accounting.

Accounting... The process of analyzing business transactions and recording them in an orderly and logical manner for information, reference, reporting and historical purposes.

Chart of accounts... The framework within which accounting records are uniformly classified to provide an organized and descriptive representation of how money and events flow within your organization. Each account that appears in a chart of accounts generally contains an account (identification) number which allows you to quickly and efficiently isolate that specific account from all others. And, each account contains a description (title) to remind you of what kind of financial information may be found in that account.

Journal... Rather than listing every detailed transaction that occurs in your business in the General Ledger, it is wise to maintain multiple subsidiary Journals to contain the many details of daily operations. Journals such as Inventory, Accounts Receivable, Cash receipts, Payroll and Accounts Payable all should be separately maintained. Then, only the summary totals from each journal is actually recorded in the General Ledger itself. If you needed to inquire in more detail about a specific balance in your General Ledger you would simply refer to the "subsidiary journal" where the detail information is recorded. For the purpose if identification, a Journal may be referred to as a "book of original entry" and a Ledger as a "book of final or summary entry".

General Ledger... The final resting place of all business financial information. It is the ultimate financial record of any business, large or small. Everything - assets, liabilities, income, costs, ownership equity - is recorded here in greater or less detail. While it may contain only summary entries for some accounts, any information not listed in detail is supported by the existence of one or more supporting Journals

Balance Sheet... Is a statement of the current financial condition of a business. It includes all bank balances, notes, loans, receivables, stocks, owner's equity and any orther assets or liabilities that may exist. It is accumulative from year to year, so if any retained earnings or obligations exist from a prior year they are also included in this report.

Income Statement... Tells you your monthly and year-to-date profitability based on your sales, cost of sales, and expenses. By listing them in an orderly fashion, it "tells the story" of how profitable or unprofitable you have been. At the beginning of each year any profit or loss contained in your income statement is transferred to your balance sheet to be accumulated as retained earnings. Then, your income statemnt starts over each year with zero balance and thus only reflects events of the current year.