A general ledger is a record which sorts, stores, and summarizes business transactions. The information required to prepare the financial statements of a business organization is maintained in the general ledger.
A general ledger records information of every financial transaction pertaining to the lifetime of an operating business. Ledgers record financial data using debit and credit accounts which are validated by a trial balance. The information in the general ledger account is required for preparing the financial statements of the business. Based on the transaction type this data is divided into accounts of assets, liabilities, revenues, expenses, and owners’ equity.
Details of transactions are put together and summarized at different levels so as to produce financial reports such as income statements, trial balances, cash-flow statement, balance sheets, etc. Ledgers help accountants, analysts, managers, investors, stakeholders, etc. to assess the performance of the business on a regular basis.
A few examples of the most general ledger accounts:
- Asset Accounts: For e.g. cash, inventory, accounts receivable, land, investment, equipment
- Liability Accounts: For e.g. accounts payable, notes payable, customer deposits, accrued expenses payable
- Stockholders’ Equity Accounts: For e.g. equity share capital account, treasury stock, retained earnings, accumulated other comprehensive income
- General Ledger Control Accounts: When general ledger accounts become summary records, they are called as control accounts. For e.g. accounts receivable, accounts payable, inventory, equipment.
Accountants use general ledger to store and organize financial information which creates financial statements of the business. As the company’s chart of accounts defines, the transactions are posted to separate individual sub-ledger accounts. These transactions are summarized to the ledger and a trial balance is generated by the accountant. The trial balance acts as a report of every ledger account’s balance. By posting additional entries to the ledger account, any error in the trial balance is adjusted. The adjusted trial balance is then used for generating financial statements of the business.
Businesses that follow the double-entry bookkeeping method of accounting use general ledgers. Due to this, every financial transaction affects a minimum of two sub-ledger accounts. Every double-entry (journal entry) made in the ledger has at least one credit and one debit transaction. These entries are posted in two columns of credit entries (on the right) and debit entries (on the left). The sum of both these entries should be balanced out (credit entries = debit entries) by creating a balancing figure which will then be transferred to the Trial Balance.
This format is followed by the balance sheet which shows detailed accounting information. The equation requires that the transactions on the left-hand of the equation should be equal to the total of the transactions on the right-hand of the equation. This balancing rule applies even if the equation is positioned differently.
The equation followed by an income statement transaction is as follows:
Net Income/Profit (NI) = Revenue (R) – Expenses (E)
An accounting transaction can affect both the income statement and the balance sheet at the same time.
Examples of some general ledger income statement accounts are as follows:
- Operating Revenue Accounts: For e.g. sales, service fee revenues
- Operating Expense Accounts: For e.g. salaries expense, advertising expense, rent expense
- Non-operating or Other Income Accounts: For e.g. profit on sale of assets, loss on disposal of assets, interest expense.
An important part of a business organization’s double-entry book-keeping system is its general ledger. Its accounts include of all transaction data required to produce financial reports like balance sheets, income statement, etc. Therefore, it is extremely significant to maintain an accurate and up-to-date general ledger to avoid any discrepancies in the company’s financial statement.