What is the Full Form of GL?
The full form of GL is General Ledger. It can be defined as the books of accounts that contain ledger entries that record ledger entries and it provides an extensive and systematic record of all the monetary transactions of an organization that is used in the preparation of financial statements and evaluating the overall financial well-being of an organization by allowing users to look at the broader picture.
GL can be classified as follows:
- Expense ledgers: This type of ledger is used for recording all the expenses incurred by an organization. Rent account, electricity account, etc are examples of an expense ledger.
- Capital ledgers: This type of ledger is used for recording transactions pertaining to capital introduced or withdrawn from an organization.
- Income ledgers: This type of ledger is used for recording all types of income earned and accrued by an organization. Interest received, sales, etc are examples of an income ledger.
- Liability ledgers: This type of ledger is used for recording all types of debts owed by an organization. Creditors, borrowings, accounts payable, etc are examples of liability ledgers.
- Asset Ledgers: This type of ledger is used for recording all types of asset-related information. Bank, cash, debtors, furniture, machinery accounts, etc are examples of an asset ledger.
How Does it Work?
A general ledger is used by the accountants for storing and organizing financial information that is used for the creation of an organization’s financial reports. All financial transactions of an organization are posted to their dedicated sub-ledger accounts. These transactions are then summarized and used for the purpose of preparation of a trial balance which acts as a report for each and every ledger account’s balance. The accountant then checks the trial balance for identifying if there are any errors and adjusts the same by posting necessary journal entries. The accountant then takes the adjusted trial balance into use for generating the financial reports of an organization.
ABC Limited trades in furniture. It sold 10 units of furniture at $200 each to its retailer for cash on 10 January 2020. Post the ledger entries for ABC Limited concerning the above-said transaction.
The above-posted entries i.e. cash and sales entries will be posted to cash and sales account respectively. The cash and sales account for ABC Limited are-
Need of GL
It is needed for the following reasons:
- It helps in the identification of fraud.
- Helps users to minimize or eliminate errors and frauds.
- It allows users to immediately stop abnormal transactions.
- The general ledger helps the users to complete their trial balance.
- It provides an accurate overview of all business transactions.
- General ledgers make filing income tax returns really easy for the users since they have expenses incurred and income earned all in one place.
- General ledger allows users to compile their key financial statements that include an income statement, cash flow statements, and balance sheets. Thus, aiding in the evaluation of profitability, liquidity and financial wellbeing as a whole.
General Ledger vs General Journal
The difference is as follows:
- Definition: General ledger can be defined as an account that is used for the purpose of sorting, storing and summarizing the financial transactions of an organization whereas a general journal can be defined as a book of accounts that records every financial transaction in chronological order.
- Basis of entry: Entries are posted on the basis of the accounts that are affected whereas in a general ledger entry are posted on the basis of chronological order.
- Entry point: A general journal is the first entry point whereas a general ledger is the second entry point in accountancy for recording a financial transaction.
The advantages are as follows:
- The general ledger helps in learning the financial well-being of an organization at any point in time.
- It acts as an insight into a company’s transaction. General ledger allows the auditors to take a deep plunge in learning the operations of an organization.
- A detailed analysis of general ledgers allows the auditors of an organization to form a deep understanding of the well-being of an organization.
- General ledger facilitates BRS or bank reconciliation statements too as all the financial transactions belonging to a particular bank account are recorded in one place.
- The classification factor enables the organization to view its debtor’s ledger totals at one go.
The disadvantages are as follows:
- Expensive and Time-Consuming: The general ledger system can be highly expensive as well as time-consuming. An organization may need to hire accountants for posting their transactions to the general ledger. This system involves a lot of labor too. This is why most small business organizations feel difficulty in opting and managing the GL system of accounting.
- Prone to Errors: Another disadvantage is that it could be the fact that these are highly prone to frauds and errors. The possibility to commit errors and mistakes is always high in a general ledger.
Thus General Ledger (GL) enables the users of the financial statements to look at the broader picture. It provides a systematic and meaningful record of all types of financial transactions of an organization that is highly useful in the preparation of financial statements. It allows users to evaluate the financial well-being of an organization. It can be classified as expense ledger, asset ledger, capital ledger, income ledger, and liability ledger.
This has been a guide to the Full form of GL (General Ledger). Here we discuss classification, examples, need and how does general ledger work along with advantages and disadvantages. You may refer to the following articles to learn more about finance –