What is a General Ledger in Accounting?

General Ledger

All small or large scale firms require a record of bookkeeping about all the financial workings held on a day-to-day basis. Although keeping a tab on every activity, transaction, expense, and company’s entire financial accord is a painstaking task.

Here comes the hand of a General ledger, which works like a charm for maintaining and organizing all kinds of accounting records.

What does a General Ledger Mean?

General ledgers also known as GL, are master financial statements that record all of your company’s financial Transactions. The accounts that are recorded in a General ledger include equity, expenses, assets, liabilities, and income or revenue.

Since the earliest times, the general ledger has been a cornerstone of good accounting. Before computerization, accountants literally ‘kept the books‘ by handwriting entries into massive ledgers, that was how businesses of all sizes kept track of every transaction. 

Despite the modernization in recording transactions, the importance of a general ledger never fails to dim its light. A general ledger may include a physical or digital record of such information, which may be integrated into a more robust system of accounting software.

The general ledger is organized as follows:

  • Balance Sheet Accounts – {Fixed assets, Retained earnings, Debt, Accumulated depreciation, Common stock}
  • Income Statement Accounts – {Utility expenses, Payroll tax expense, Compensation expense, Cost of good sold}

Features of General Ledger

  1. Effective-Date Transaction Processing 
  2. Average Balance Processing for Specific Book Sets
  3. Captures Average Balances
  4. Allowing Back-Value Transactions
  5. Control Transaction Balancing by Effective Date

In the Context of Accounting, Where does General Ledger Stand?

The General Ledger of a company serves as the foundation for its financial reporting and the source of the information further used in it.

All these transactions are carried out and then noted from a source document from a bill or an invoice. Further, all the transactions are timely recorded and posted in a general ledger, and since the GL incorporates a company’s entire financial account, it is useful in preparing key financial reporting documents such as the balance sheet and income statement.

For each type of transaction, a separate general ledger account is created. Now, for example, separate general ledger accounts for raw materials inventory, work-in-process inventory, finished goods inventory, and merchandise (purchased) inventory may exist within the general area of inventory assets.

There are Three Key Concepts to Understand in General Ledger Accounting:

A. The Basic Accounting Equation

B. The Double-Entry Accounting

C. The Journals

All these three core concepts are stretched out for your better understanding. Take a look:

The Basic Accounting Equation

The primary objective of double-entry accounting or double-entry bookkeeping is to satisfy the basic need that the accounting equation balances.

The equation is as follows:

Assets= Owner’s Equity + Liabilities 

If in case the sum of all debits for all accounts does not equal the sum of credits at any point, then the equation will not balance. 

For example: 

If you pay a $200 expense, you enter a debit entry on the expense side and a credit entry on the cash side.

Also Read: Credit Card Reconciliation in Sage 50

The Double-Entry Accounting

The double-entry accounting method is used for general ledger accounts in financial reporting: A transaction in one account necessitates a transaction in another, i.e; when you enter a debit on one account, you must also enter a credit in the other general ledger account. 

The General ledger accounts are also known as ‘T’ accounts. The debits are represented on the left side and alternatively, the credits are visible on the right.

For example: When an accountant enters a credit entry into the credit account, this increases an owner’s equity and has a positive impact on the liabilities account. As a result, because there is no more cash in the bank, the debit account will decrease.

This balancing act accounting method is widely used by finance teams.

Journal Entries

Journals are documents used to analyze the finer points of your business. Mainly the Journal entries almost always provide detailed areas of accounting information and on the other hand, the general ledger presents a much more comprehensive picture of financial performance.

All the financial transactions are carried out and recorded first in journals, then being recorded in the general ledger.

Usually, there exist Seven types of Journals. They are as follows:

1. Cash Payment/Disbursement journal: This Journal focuses on the cash flowing out.

2. Sales journal: This journal is mainly for recording credit sales.

3. Cash Recipients journal: This journal presents cash inflows.

4. Purchase journal: It presents the credit purchases made by a business.

5. Purchase return journal

6. Sales Return journal

7. General journal

All the above-mentioned journals are taken into use to record the incomings and outgoings managed every day.

Why is General Ledger Useful for you?

A General Ledger can prove to be a helping hand in recording all the financial transactions to ease out the process of recording accounts every day manually.

To assist you in tracking and evaluating every financial transaction for your small business, General Ledger can be of optimum help.

Following are the Reasons why General Ledger is favorable:

1. It immediately alerts you to unusual accounting transactions.

2. General ledger reports actual revenue and expenses so you can keep track of your spending.

3. It assists you in compiling a trial balance hence your books balance.

4. The document keeps a detailed record of all financial transactions in a place.

5. Just because all income and all expenses are kept in one place, it, therefore, makes filing tax returns easy.

6. It aids in the detection (and prevention) of fraud.

When it comes to financial accounting and keeping track of every business transaction, the general ledger is unrivalled.

Also Read: Reconciling Bank Accounts using Sage 50

All of these transactions are completed and then recorded on a source document, such as a bill or an invoice.

All the users have to do is enter their expenses and track their revenue; everything else should be automatically classified in a general ledger account.


Frequently Asked Questions:

What does a GL code stand for?

GL or General Ledger codes stand for numerical names that are given to accounts.
Account #105, for example, could be the GL code for accounts receivable. Electric bills could be as high as $203. This coding system is used to group accounts that are related.

How can we take forward the GL Reconciliation process?

For carrying out the General Ledger Reconciliation, the process begins with gathering information for each account under review and then followed by an examination of any journal entries made to correct errors in the ledger.

How can one perform the General ledger process accurately?

The process goes in the following ways:

1. Create a journal or log with the transaction details as each transaction takes place.
2. Categorization of the transactions under relevant accounts, i.e.; cash, sales, or accounts payable.
3. Reconcile the information in the accounts in a timely cycle.
4. Transfer the journal entries to the GL, once the above is completed.

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