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 record ledger entries. 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- Capital ledgers: This type of ledger is used for recording transactions about capital introduced or withdrawn from an organization.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 payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period., 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?
The accountants use a general ledger for storing and organizing financial informationOrganizing Financial InformationFinancial Information refers to the summarized data of monetary transactions that is helpful to investors in understanding company’s profitability, their assets, and growth prospects. Financial Data about individuals like past Months Bank Statement, Tax return receipts helps banks to understand customer’s credit quality, repayment capacity etc. 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 accountsSub-ledger AccountsA subledger is a subset of several general ledgers used in accounting that may include all accounts receivable, payable, prepaid expenses, or fixed assets associated with financial transactions. It is extremely difficult to keep track of all transactions in a large organization's common ledger; therefore, a subledger is the ideal solution for recording entire transactions.. These transactions are then summarized and used for the preparation of a trial balance, which acts as a report for 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 balanceAdjusted Trial BalanceAdjusted Trial Balance is a statement which incorporates all the relevant adjustments. Although it is not a part of financial statements, the adjusted balances are carried forward in the different reports that form part of financial statements. into use for generating the financial reportsFinancial ReportsFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. of an organization.
ABC Limited trades in furniture. It sold ten 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,s 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 business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company's financial statements..
- General ledgersGeneral LedgersA general ledger is a book of accounts that records the everyday business transactions in separate ledger accounts. The entries made in a ledger can be verified by getting a NIL balance on summing up all the ledger account amounts in the trial balance. make filing income tax returns easy for the users since they have expenses incurred, and income earned all in one place.
- General ledger allows users to compile their critical financial statements that include an income statementIncome StatementThe income statement is one of the company's financial reports that summarizes all of the company's revenues and expenses over time in order to determine the company's profit or loss and measure its business activity over time based on user requirements., cash flow statementsCash Flow StatementsStatement of Cash flow is a statement in financial accounting which reports the details about the cash generated and the cash outflow of the company during a particular accounting period under consideration from the different activities i.e., operating activities, investing activities and financing activities., and balance sheetsBalance SheetsA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company.. Thus, aiding in the evaluation of profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance., 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 sorting, storing, and summarizing the financial transactions of an organization, whereas a general journal can be described as a book of accounts that records every financial transaction in chronological order.
- Basis of entry: Entries are posted based on the accounts that are affected, whereas in a general ledger entry are posted based on chronological order.
- Entry point: A general journalGeneral JournalThe General Journal is a book of entry that holds the initial record of every transaction before being posted to the concerned accounts like Sales Journal, Purchase Journal, & Cash Journal etc. 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 auditorsThe AuditorsAn auditor is a professional appointed by an enterprise for an independent analysis of their accounting records and financial statements. An auditor issues a report about the accuracy and reliability of financial statements based on the country's local operating laws. 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. That’s why most small business organizations feel difficulty in opting and managing the GL system of accountingSystem Of AccountingAccounting systems are used by organizations to record financial information such as income, expenses, and other accounting activities. They serve as a key tool for monitoring and tracking the company's performance and ensuring the smooth operation of the firm..
- 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 statementsUsers Of The Financial StatementsFinancial statements prepared by the Companies are used by different categories of individuals and corporates on the basis of their relevancy to the respective parties. The most common users to the financial statements are Management of the Company, Investors, Customers, Competitors, Government and Government Agencies, Employees, Investment Analysts, Lenders, Rating Agency and Suppliers. 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 article 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 –