What is General Ledger of Accounts?
The general ledger records the financial data for a company’s day to day transactions and records the debit and credit entries as per the double-entry accounting concept and gets verified through a matched trial balance which nets to NIL on the summation of all General Ledgers in an accounting package.
The general ledger is segregated into different Balance sheet (Assets, Liabilities, Equity) and Profit & Loss (Revenue, Cost of Sales, Other expenses) account types which helps in preparing a company’s financial statements on a periodic basis.
Types of General Ledger Accounts
General Ledger is divided into two broad types:
#1 – Balance Sheet Accounts
- Assets: Cash, Items in course of the collection, Trade Receivable, Land, Deferred & Current Tax, Equipment, Loans & Advances given.
- Liabilities: Accounts Payable, Deposits taken, Bonds & Debentures, Current & Deferred Tax liabilities.
- Equity: Retained Earnings, Equity Share capital, Capital Reserves, Revaluation Reserve, Minority Interest.
The Balance sheet accounts are known as real accounts or permanent accounts as these balances are carried forward to next year as well after the close of the financial year.
#2 – Income Statement Accounts
- Operating Revenue: Sales, Service Fee, and Commission.
- Operating Expenses: Cost of Sales, Salary expense, Rental expense, Depreciation
- Other Revenue/Income: Interest Income, Investment income, Gains on Sale of Fixed assets.
- Other Expenses: Interest expense, Loss on sale of fixed assets.
Income statement accounts are known as Nominal Accounts which summarises a business revenue and expenses within a period of time such as a financial year.
Examples of General Ledger Accounting
Below are some examples of general ledger accounting.
On July 16, 2019, USA company sold goods to customers for cash $55,000.
The journal entry of the above transaction and its posting to ledger accounts is illustrated below:
General Journal and General Ledger
- The biggest advantage is a preparation of trial balance, one can’t imagine a balanced trial balance without proper preparation of General Ledgers.
- We also cannot prepare our Financial Statements such as Trading, Profit & Loss Account and Balance sheet, if we don’t follow the General Ledger System of Accounting.
- General Ledger is the pure application of Double Entry System of Book Keeping and we can obtain results of each account as at a particular period end or over the period.
- Helps in getting the detailed breakdown of daily financial transactions occurring in a business, which can be used for various types of statistical analysis and financial decision making by Finance Management of a business.
- This Accounting helps in keeping a complete audit trail of transactions in a sequential and logical manner which assists during internal, external and Sox Audits compliance as well.
- Sale, purchase of goods, revenue, expenses, stock movements and profitability of different years can be compared to prepare various kinds of trend analysis to measure the current business status and remedial measures to be taken for future.
- We can easily ascertain the amount payable to our trade creditors and amount receivable from our trade debtors and prepare an aging analysis to make necessary provisions in books of accounts.
Despite many advantages, General ledger system of accounting has some minor disadvantages as well which are listed below:
- This system involves time, labor and money. It becomes difficult for smaller concerns to afford costly accounting packages and high paying staff accountants.
- In some systems and concerns, general ledger system of accounting requires serious expert knowledge for keeping and maintaining the books of accounts in a logical manner due to the complex nature of packages.
- There is a greater possibility of committing errors and mistakes as sometimes the Journal entries may be erroneously passed in wrong general ledgers. This system also increases the size of books of accounts.
Changes/Innovation in General Ledger System of Accounting
General ledger system is around for decades now and helps in serving many purposes such as:
- Preparation of Trial balance and financial statements in a timely manner.
- Tracking balances over time and preparing trend analysis for management information systems.
- Knowing the difference between a balance and change in balance.
Accounting systems have gotten particularly good at generating various types of financial reports but the inherent power in the General Ledger System of accounting has been overlooked. In modern days, users want to manage their financial accounting systems in a way which they want to use and operate and align to business goals and needs, some of these measures include:
- Business-specific needs that can be used in a cost-efficient manner and can be tracked/managed easily.
- Tracking business results that fall outside the remit of Local GAAP and easily converts to International Accounting standards on Group consolidation.
- Being able to meet regulatory compliance challenges on the transition from Old to New Systems of General Ledger Accounting System. For example, in the UK recently many banks have switched to new accounting software versions from Old systems to meet the UK regulatory authority orders.
It is clear that the benefits and advantages of General Ledger accounting clearly outweigh the disadvantages of general ledger system of accounting and is regarded as the best approach in the double-entry system of accounting. This system is in place since ages now and has undergone many changes over time in terms of speed, accuracy, and transparency through the introduction of latest and modern accounting software packages and the in-built technology that it comes with.
Changes and innovation can be further explored in this area through the introduction of user-specific reports and easy to comprehend statistical data for use by Business management and various users.
This 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 –