Accountants formerly used the double-entry accounting method to manually enter financial transactions into the general ledger.
The invention of computers made transaction recording easier. General ledger entries no longer needed to be made in books; instead, you could utilize effective accounting software and Excel sheets.
The general ledger’s significance has not changed despite changes in how transactions are recorded. It’s a fundamental accounting document for generating financial reports and essential for assessing the company’s health. We’ll review a general ledger’s definition, operation, and necessity.
What is a general ledger (GL)?
An organization utilizes a general ledger (GL)—a group of numbered accounts—to record its financial activities and generate financial reports. A unique record detailing a particular asset, liability, equity, revenue, or expense makes up each account.
All the accounts in the general ledger are listed on a chart of accounts. A large company’s GL may contain thousands of accounts. The people with access to and use general ledgers include certified public accountants (CPAs) and bookkeepers.
Any debit made to a GL account will have a similar and equal credit entry in another version, and vice versa, according to the accounting equation.
Companies use general ledgers for the following reasons:
- monitor finances;
- track transactions and cash flow;
- compile and maintain information for business-related reports; and
- help prevent accounting errors and fraud.
What Is a General Ledger Used For?
The general ledger allows business owners (and their accountants) to see every transaction for the month, quarter, or year in detail. Consider the following scenario: The trial balance review reveals an unexpected balance in fixed assets at year’s end.
If so, your accountant may examine the general ledger report to see specifics for each transaction that affected your fixed asset accounts during the year. They might discover and fix accounting mistakes, including transactions submitted to the wrong account or for incorrect amounts.
Why do businesses use general ledger accounts?
A general ledger benefits firms in the following three ways, among others:
- Financial records.
GLs produce critical financial statements for a variety of internal stakeholders. They can use the financial data supplied in those documents when making company decisions.
- Accounting data.
A GL also offers financial accounting records for all company transactions and account balances within an organization. These documents and the financial information they hold can aid accountants in identifying transactions that are unexpected, incorrect, or fraudulent.
- Trial balance. A GL enables a business to compile a trial balance where all debits and credits are totaled. Most organizations do this periodically to proactively stay on top of expenses at the end of a reporting period.
How is a general ledger put to use?
A summary of all transactions posted to subsidiary ledger accounts, such as cash, accounts payable, accounts receivable, and inventory, is kept in the general ledger. Double-entry accounting is the procedure used by general ledgers. This method represents expenses and income as debits and credits in monetary terms.
There are four primary parts to each general ledger item or entry:
- a journal entry describing the item number of the transaction posted to the account;
- a description of the specific transaction;
- a debit or credit value for the net balance change; and
- a resulting balance after the credit or debit is posted.
The daily recording of transactions during bookkeeping is done in other records, referred to as journals or daybooks, which are separate from the central ledger. The accounting entries for each business transaction are in chronological order in the general bulletin.
Cash payments against an invoice and their sums, which are recorded in corresponding accounts in the general ledger, are examples of these transactions. Instead, the transactions will often be documented in sub-ledgers or modules in accounting software.
Other significant financial reports, including the balance sheet, also known as the statement of financial position, are then updated with the general ledger’s totals. The income statement, which lists revenues and expenses, is included in the balance sheet and information on assets and liabilities.
After the accounting year, income statements that are treated as temporary accounts are closed. Whether positive or negative, their net amounts are added to the equity section of the balance sheet.
A private company’s shareholders’ or owners’ equity, a nonprofit organization’s retained earnings, or figures obtained by deducting liabilities from tangible and intangible assets are a few examples of what might fall under the equity category.
On the other hand, the accounts that go into the balance sheet are permanent accounts used to monitor the continued financial stability of the company.
Budget accounts are distinct from general ledger accounts. Instead of only showing predicted amounts in a budget, they display actual amounts spent or received. A business may use blockchain technology to keep its general ledger, which can stop fraudulent accounting activities and maintain the integrity of the ledger’s data.
Five general ledger account categories
Assets, liabilities, equity, revenue, and expenses are the different categories for general ledger accounts.
The chart of accounts is also included in the general ledger.
Assets are resources with a monetary worth that companies employ to make money. Equipment is an example of a tangible asset. However, assets can also be intangible (copyright). Examples of assets are cash, goods, real estate, trademarks, and patents.
A company has liabilities when it owes money to another company or person. Payroll for employees, bank loans, mortgages, and leases are examples of liabilities.
The difference between total assets and total liabilities is known as equity. Any money left over after a company has sold its assets for cash and paid off all of its debts is considered equity. There are three parts to the equity balance:
- Common shares. The number of shares issued multiplied by the stock’s par value represents the expected stock balance if the corporation issues stock to investors. Par value is often $1 or $5 per share.
- Further capital contributions. Investors pay this amount in dollars over the par value for common shares. $10 for each share of stock with a $1 par value posts to additional paid-in capital, posting $9 per share.
- It retained income. A company can keep its profits for internal use or pay them dividends to shareholders. Total earnings from the company’s founding are deducted from the dividends paid to shareholders to arrive at the retained earnings balance.
Small businesses that don’t issue stock use an account called owner’s equity instead of common stock. The owner’s equity is the total cash and other assets that the owners contribute.
The selling of a good or service creates income. Sales, interest income, royalties, and any other fees the company receives are all considered revenue.
A company must spend money to make money. Utility costs and rent are standard business expenses.
Additional GL account types
The accounts above are found in every general ledger. However, other arrangements can be used to track unique categories, carry out helpful computations, and summarize sets of accounts. The second kind is referred to as a control account.
For instance, a CPA might utilize a T-account to track only the debits and credits in a general ledger account (so-called because of its physical arrangement in the shape of a T).
Double-entry bookkeeping and general ledgers
Each entry in the general ledger must comply with the requirements of double-entry bookkeeping and appear twice: once as a debit and once as a corresponding credit. Additionally, the sum of the two must be zero.
The definitions of debit and credit in accounting differ from their ordinary usage. Depending on the type of account, each may increase or decrease the total balance. For instance, debiting a revenue account increases it, whereas debiting an expense account causes it to drop. Accounts for goods receipts and invoice receipts may contain a credit balance or a debit balance.
Reconciliation of the general ledger
A trial balance is created by listing all debit and credit accounts and their sums after each fiscal period. They are separating those with debit balances from those with credit balances. The proportions of the debit and credit accounts are then added together to ensure equality.
The accountant checks the accounts and journals for mistakes if they aren’t. The trial balance, however, does not demonstrate that the other records are error-free. For instance, the totals in the trial balance would still match and not point to an issue if journal entries for debit and its matching credit were never made.
General ledger reconciliation is a technique businesses use to identify and fix such inaccuracies in accounting records. Blockchain technology is utilized in various areas of accounting and finance to streamline and reduce the cost of the reconciliation process.
What details do you learn from a general ledger?
Financial statements for stakeholders, including investors, creditors, and regulators, can be produced with the aid of the general ledger. Ledger data can also be used to create management reports for decision-making.
A business owner can check the general ledger to find out why expenses have increased if they do so. An accountant can examine the public ledger and adjust entries to correct any accounting irregularities.
Every company should make an effort to keep correct accounting rector to provide trustworthy financial statements.
What Functions Does a General Ledger Serve?
A general ledger is used in accounting to document all business activities. Transactional information is categorized into assets, liabilities, income, expenses, and owner’s equity in a general ledger.
The accountant creates the trial balance once each sub-ledger has been closed out. The company’s financial statements, including its balance sheet, income statement, statement of cash flows, and other financial reports, are then made using the information from the trial balance.
Is the Double-Entry Bookkeeping Method Comprised of General Ledger?
Yes, a business that employs the general ledger bookkeeping system for its financial records does so. Double-entry bookkeeping is used when every transaction impacts a debit and a credit transaction.
In another way, every transaction is represented by two columns—a debit column and a credit column—and their sums must be equal. The following equation holds when using this balancing rule:4
- Stockholders’ Equity = Assets Minus Liabilities.
What Is a General Ledger Entry Example?
Consider the scenario when a business is compensated $1,000 by a client for its services. The accountant would add $1,000 to the asset column and take $1,000 from the accounts receivable column.
Since only one side of the accounting equation—the asset side—is affected by the comparable rise and drop, the equation remains in balance.
General ledgers are the master financial statements that track all of your company’s financial transactions. The public ledger is unparalleled in financial accounting and keeping track of every business transaction.
Fortunately, keeping their books and comprehending their financial performance doesn’t require you to have a thorough understanding of how the general ledger operates.
You only need to be familiar with the fundamentals of double-entry accounting and work with an accountant who can provide financial statements that will allow you to assess the success of your company and your financial situation.