General Ledger Definition
How Does a General Ledger Work?Preparing a general ledger is a crucial step in the accounting processThe accounting process is the series of steps followed by the business entity to record the business financial transactions, which includes steps for collecting, identifying, classifying, summarizing, and recording of the business transactions in the company's books of accounts so that the entity's financial statements can be prepared and the profits and financial position of the business can be known at regular intervals of time.read more. An organization initially records every financial transaction in a general journal, where the entries are called journal entries. The next step involves classifying journal entries as separate accounts in a general ledger. Resultantly, there will be a cash account, salary account, payables account, etc. Thereafter, relevant debit or credit amounts will be noted in the account’s ledger. Then, debit and credit values will undergo further calculations to arrive at a final balance of different accounts. Ledger balancing assists in computing how much assets, liabilitiesLiability is a financial obligation as a result of any past event which is a legal binding. Settling of a liability requires an outflow of an economic resource mostly money, and these are shown in the balance of the company.read more or revenue sources, etc., are left with an organization at the end of an accounting year. Using this computation, an organization prepares its financial statements. General Ledger and Financial StatementsAfter the ledger entries, the balances of all the ledger accounts are taken to the trial balance sheet. A trial balanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more is a worksheet with the column of debit and credit corresponding to the rules of double-entryThe double-entry accounting system refers to the double effect of every journal entry. It is based on the dual aspect i.e. Debit and Credit and this principle states that for every debit, there must be an equal and opposite credit.read more bookkeeping or dual aspect of accountingThe dual aspect concept states that since every transaction has a dual effect, the accounting records must reflect the same to show the accurate movement of funds. For instance, a buyer pays cash in return for a purchased item while the seller gains cash for the sold item. This makes a transaction dual, affecting two accounts simultaneously, and hence it should be registered likewise.read more. As per bookkeepingBookkeeping is the day-to-day documentation of a company’s financial transactions. These transactions include purchases, sales, receipts, and payments.read more rules, every financial transaction affects two accounts, causing them to either gain or lose something with equal amounts. Goods purchased with cash will cause goods to be debited as an asset while cash getting credited to finance the purchase. Trial balanceTrial Balance is the report of accounting in which ending balances of a different general ledger are presented into the debit/credit column as per their balances where debit amounts are listed on the debit column, and credit amounts are listed on the credit column. The total of both should be equal.read more holds the balance of all the ledger accounts. If bookkeeping and accounting are done correctly, the sum of the trial balance’s debitDebit represents either an increase in a company’s expenses or a decline in its revenue. read more side and credit side will match. If it doesn’t, it is an indication of discrepancies or errors and will require rectification. Only after the balances match, the accounts will be considered for loss or profit calculations using expenses and revenues in the income statement. Also, assets, liabilities, owner’s equity, expenses, and revenue amounts will be taken to the balance sheet. The debit balanceIn a General Ledger, when the total credit entries are less than the total number of debit entries, it refers to a debit balance. A debit balance is a net amount often calculated as debit minus credit in the General Ledger after recording every transaction.read more and credit balance should match as the accounting rulesAccounting rules are guidelines to follow for registering daily transactions in the entity book through the double-entry system. Here, every transaction must have at least 2 accounts (same amount), with one being debited & the other being credited. read more require the asset side total to be equal to the sum of all the credit side entries as assets = liability + owner’s equity. General Ledger FormatThe format or template of a general ledger usually includes the following details –
Examples of General Ledger AccountingExample #1On July 16, 2019, USA company sold goods to customers for cash $55,000. Below is the transaction’s journal entry. We have also provided the two accounts’ ledgers in which the journal entry will be posted. Example #2On January 1, a firm received $10,000 from a debtorA debtor is a borrower who is liable to pay a certain sum to a credit supplier such as a bank, credit card company or goods supplier. The borrower could be an individual like a home loan seeker or a corporate body borrowing funds for business expansion. read more. On January 9, the firm purchased some goods with $4000 cash. Also, the business paid $1000 rent on January 11. Prepare ledgers for all the three accounts. Solution
Cash Account
Debtor Account
Goods Account
Rent Account
FunctionsA general ledgers fulfills many functions which are listed below –
General Ledger Vs General JournalAs discussed before, the financial entries are first recorded in a general journal. For example, goods purchased with cash will be recorded in the the general journal as a journal entry. The journal entry will debit goods as an asset and credit cash as it will be going out or reducing to purchase the goods. After the journal entry, the debit and credit amounts will be taken to the respective ledger accounts of cash and goods. Here the entries will be balanced to be taken to financial statements. As such, the journal and ledger both have the most crucial roles in an accounting process to ensure that no transaction is missed out. For any details on the transaction, confusion or rectification, accountants refer to these two books of accounts. FAQsWhat is a general ledger? A general ledger records and processes a firm’s financial data, taken from the general journal. It helps in the accurate creation of income statement and balance sheet as per standard accounting norms. What are the four sections in a General Ledger? General ledgers have the columns of date, description, debit and credit amount. The description could be an expense, revenue, liability, asset or equity entry. What is a general ledger with example? There are many examples of a general ledger as they record every financial transaction of a firm. Furniture account, salary account, debtor account, owner’s equity, etc., are some examples. Below is one example. Goods Account Recommended ArticlesThis has been a guide to what is a general ledger. Here we discuss the types of General Ledger along with practical examples, advantages, and disadvantages. You can learn more about financing from the following articles –
What is general ledger in simple terms?A general ledger (GL) is a set of numbered accounts a business uses to keep track of its financial transactions and to prepare financial reports. Each account is a unique record summarizing a specific type of asset, liability, equity, revenue or expense.
What is a general ledger example?Examples of General Ledger Accounts
asset accounts such as Cash, Accounts Receivable, Inventory, Investments, Land, and Equipment. liability accounts including Notes Payable, Accounts Payable, Accrued Expenses Payable, and Customer Deposits.
What is a general ledger and how does it work?In accounting, a general ledger is used to record all of a company's transactions. Within a general ledger, transactional data is organized into assets, liabilities, revenues, expenses, and owner's equity. After each sub-ledger has been closed out, the accountant prepares the trial balance.
What are the 4 sections in a general ledger?General ledger components
Journal entry: Information about each journal entry posted to an account and the entry date. Description: A brief description of the transaction. Debit and credit columns: Each journal entry is posted as either a debit or credit. Balance: A running balance is kept for each account.
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