The general ledger keeps the record of all a company’s financial transactions. Accountants enter each transaction into the general ledger. These transactions are organized into assets, liabilities, revenue, expenses, and the owner’s equity. Maintaining a general ledger is a key part of bookkeeping for a business. Accountants, investors, stakeholders, analysts, and company managers use the general ledger to assess the financial health and performance of a company.
The purpose of a general ledger is to provide a foundation for the financial record-keeping system for each accounting period or cycle. It holds all the business’s accounts and each transaction in each account. General ledgers are used with the double-entry accounting system and follow the equation equity+liabilities=assets.
General ledgers are used by accountants to record and organize financial data for a company or business. The data is then used to create financial statements for the organization. Transactions are posted to separate sub-ledger accounts. Then the transactions are closed out and summarized in the GL. Accountants use the information in the general ledger to generate a trial balance. This serves as a financial report for each account balance in the ledger. The trial balance is checked, and any errors are corrected. Then the accountant uses the adjusted trial balance to generate financial statements.
What is a General Ledger?
A general ledger is the master accounting document for a company. It provides a complete record of all the business’s financial transactions. These include changes to both asset and liability accounts, equity, revenue, and expenses. For each of these accounts, the ledger contains the account balance at the beginning of each period. Credits and debits are recorded in the general ledger as they occur. Then, the ending balance is calculated.
What is the Purpose of the General Ledger?
The purpose of a general ledger for accountants to use is to record every business owner’s transaction. It provides a detailed view of the total transactions for each month, quarter, or year. Accountants may make hundreds of journal entries posted as either a credit or a debit. The debits and credits are totaled, and they must be balanced. The accountant, or the person maintaining the general ledger, compares the debits and credits against the trial balance. The trial balance will contain each general ledger account and its balance. This allows accountants to locate errors easily and then make the necessary adjustments. The purpose is to balance the budget with credits and debits equaling each other.
Businesses benefit from general ledgers in several ways. It contains accurate records of all financial transactions. Spending is managed through the real-time reporting of revenue and expenses. The general ledger helps simplify tax filings since all the expenses and revenue are organized and in a single location. And they are helpful for keeping key information and documentation complied in one place.
How does a General Ledger Work?
A general ledger provides a collective summary of financial transactions posted to the various accounts. Subsidiary ledger accounts may include cash, inventory, accounts receivable, and accounts payable. They work using the double-entry accounting method. This demonstrates the expenses and income items expressed in dollar amounts, listed as debits and credits.
A general ledger has four components: a journal entry, description, debit/credit, and the running balance. At the end of each period, accountants will calculate a trial balance by listing all accounts with their totals. The debit and credit accounts are then totaled to ensure they are equal. If the totals are not equal, then the accountant must look for errors in the accounting or in the entries.
How do I Enter Journal Entries Into the General Ledger?
Once transactions are recorded in your journal, they need to be transferred to the general ledger. Keeping accurate books requires that each transaction from the journal is posted to the general ledger. The ledger is used to classify and organize transactions, so each journal entry should be recorded into individual accounts. Here are the steps to take for entering journal entries into a general ledger.
- Create journal entries.
- Check the debits and credits in journal entries to be sure they are equal.
- Record each journal entry in its individual corresponding account in the ledger.
- Do not change any information; use the same debits and credits.
- Calculate the account balances in the general ledger.
List outro: “How to write Journal Entries in General Ledger”?
What Types of Transactions are Recorded in the General Ledger?
The general ledger contains the record of every financial transaction made by a business. Transactions posted to the general ledger come from journal entries. They will increase or decrease the assets, liabilities, and owner equity accounts. There are four basic types of transactions recorded in the general ledger.
These types of transactions include cash, property, accounts receivable, and equipment. Physical assets like land may be included as well as intangible assets like a trademark or patent. Asset transactions include the sale or purchase of a physical or intangible asset, depreciation of property, sales to customers, and cash collection from credit accounts.
In the general ledger, liability accounts consist of accounts payable, notes payable, salaries payable, and other accounts that reflect debts the business owes. Entries for liabilities will record increases or decreases to these accounts. Types of transactions that are recorded as a liability in the ledger include payments, credit purchases, and business expenses (taxes, interest, salaries) that are expected to be paid in full by the end of the fiscal year.
The owner’s equity accounts show how much capital is invested in a business. When assets are used to pay off liabilities, the remaining amount equals the balance in the equity account or capital account. A business may also have a capital-drawing account to record withdrawals of capital made by business owners. Journal entries that are equity-related are posted in the general ledger as increase and decrease. For example, when a business owner invests cash into a business, the journal entry is recorded as an increase in the owner’s capital and cash accounts.
Another use for journal entries is to reclassify amounts. For instance, if a long-term liability comes due in the current fiscal year, it can be transferred from the long-term liability to a current liability account. At the end of fiscal years, journal entries can also be used to close out temp accounts.
How to Create a Basic General Ledger
A general ledger categorizes transactions into various accounts. Some of the most commonly used accounts include assets, liabilities, revenue, owner equity, and expenses. Here are the steps to building a general ledger for a business.
- Create the accounts for the general ledger. Each account needs its own page. For each account (assets, liabilities, revenue, expenses, and owner equity), create a table with these column headings: date, reference number, description, debit, or credit (negative/positive numbers).
- Transfer transactions from journal entries. All of the financial transactions recorded in the journal should be recorded in the appropriate account. Transactions should be recorded daily. For each entry, there will be a credit and a debit.
- Number the transactions. Under the column for the reference number, place the number of the journal transaction. These will be in chronological order.
- Debit and credit the appropriate accounts.
- Balance the debits and credits. Once the transactions have all been entered, make sure the account balances.
If you are new to creating general ledgers, start by dividing each account into two columns. The left column will contain debits and the right column credits. Assets and expenses are placed on the left side of the ledger, while liabilities, equity, and revenue are placed on the right side. Both sides of the ledger should have equal values if your ledger balances. And it needs to balance!
Why do Businesses use General Ledger Accounts?
The account totals calculated in the general ledger are useful for balancing the books for a business. But they offer numerous other benefits, too. They are necessary for preparing essential financial statements like the income statement and balance sheet.
Keeping a general ledger helps a business owner keep a tab on the business’s financial health, including profits and losses. When a company keeps an accurate summary of financial transactions, tax time is easier. The ledger provides an accurate and organized view of all revenue and expenses. Keeping the ledger up-to-date is useful for spotting unusual transactions before they cause a huge problem.
A small business owner may look at a few transactions each day. Or they may make hundreds of transactions each day. The ledger helps an owner see where they were accidentally charged twice for the same item. Another advantage is it contains real-time revenue and expenses, instead of forecasted values.
Is there a Trial Balance in the General Ledger?
Yes. The general ledger contains the records of all the financial transactions a business makes. The trial balance validates the debit and credit records. Trial balance vs General ledger: A trial balance is just a report that is run at the end of accounting periods. It lists the ending balance in each account represented in the general ledger.
Is a General Ledger Required to Balance?
Yes. The general ledger has to balance between the credit and debit amounts. Credit and debit totals must be equal for the general ledger to be balanced. The accounts must be reconciled, demonstrating that the books balance. The evidence that shows the ledger is balanced is the trial balance.