General Ledger

General Ledger Definition

A general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations.

How Does a General Ledger Work?

Preparing a general ledger is a crucial step in the accounting process. 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, liabilitiesLiabilitiesLiability 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 Statements

After the ledger entries, the balances of all the ledger accounts are taken to the trial balance sheet. A trial balance is a worksheet with the column of debit and credit corresponding to the rules of double-entryDouble-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 accounting.

As per bookkeepingBookkeepingBookkeeping is the day to day recording of financial transactions such as purchases, sales, receipts, and payments, and it is the first step in the accounting process. It can be prepared in two ways: single-entry and double-entry; however, the double-entry approach is more widely used and recognized in most countries.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 balance holds the balance of all the ledger accounts. If bookkeeping and accounting are done correctly, the sum of the trial balance’s debitDebitDebit is an entry in the books of accounts, which either increases the assets or decreases the liabilities. According to the double-entry system, the total debits should always be equal to the total credits.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 balanceDebit 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 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 Format

The format or template of a general ledger usually includes the following details –

1. Account – In this column, we need to mention the account whose ledger we are creating, for example, the cash account.
2. Account number and page number – Relevant entries need to be entered here to favor easy compilation.
3. Date – Contains the date of the transaction.
4. Description – Describes the details of the transactions.
5. Debit Amount – All the debit entries of the account need to be recorded in this column.
6. Credit Amount – All the credit entries of the account need to be recorded in this column.

Examples of General Ledger Accounting

Example #1

On 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 #2

On January 1, a firm received $10,000 from a debtorDebtorA debtor is a person or entity that owes money to the other party in a transaction. The receiver is referred to as the creditor, and the payment terms vary for each transaction based on the terms and conditions agreed upon by the parties.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

• Receiving cash from the debtor will increase the cash balance, which will be a debit entry. Cash payments for rent and goods will be a credit entry as the cash balance will go down.
• The debtor will be credited as the giver of cash.
• The goods being an asset will be debited after the purchase.
• Rent as an expense will be debited.
• After subtracting credit balance from debit, the business will be left with a debit balance of $5000 cash.
• Debtor, goods and rent had no adjustments as they were single entries.
• The balances after adjustments will be taken to the respective credit or debit side of the trial balance.
• Balance adjustments in the general ledger normally occur at the end of an accounting year. Some firms also opt for monthly adjustments.

Cash Account

Date 2020	Description	Ref.	Debit (Amount in $)	Credit (Amount in $)
Jan 1	Debtor		10,000
Jan 9	Goods Purchased			4,000
Jan 11	Rent			1,000
Total			5,000

Debtor Account

Date 2020	Description	Ref.	Debit (Amount in $)	Credit (Amount in $)
Jan 1	Debtor			10,000
Total				10,000

Goods Account

Date 2020	Description	Ref.	Debit (Amount in $)	Credit (Amount in $)
Jan 9	Cash		4,000
Total			4,000

Rent Account

Date 2020	Description	Ref.	Debit (Amount in $)	Credit (Amount in $)
Jan 11	Cash		1,000
Total			1,000

Functions

A general ledgers fulfills many functions which are listed below –

1. One can’t imagine a balanced trial balance without proper preparation of general ledgers.
2. We cannot prepare financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more such as trading, profit & loss account and balance sheet if we don’t follow the ledger accounting system.
3. It helps get the detailed breakdown of daily financial transactions occurring in a business, which can be used for various types of statistical analysis. For financial decision-making, such compilation is of utmost importance.
4. Ledgers in accounting help in keeping a complete audit trail sequentially and logically. Besides, they ensure adherence to standard accounting norms. This assists in internal and external auditExternal AuditExternal Audit is defined as the audit of the financial records of the company in which independent auditors perform the task of examining validity of financial records of the company carefully in order to find out if there is any misstatement in the records due to fraud, error or embezzlement and then reporting the same to the stakeholders of the company.read more compliance.
5. Sale, purchase of goods, revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more, expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more, stock movements, and 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.read more of different years can be compared for trend analysis. Comparing reports across years can measure the current business status to arrives at remedial measures for efficiency.
6. We can easily ascertain the trade creditTrade CreditThe term "trade credit" refers to credit provided by a supplier to a buyer of goods or services. This makes it is possible to buy goods or services from a supplier on credit rather than paying cash up front.read more and amount receivable from our debtors and prepare an analysis to make necessary changes in the accounting books.
7. Earlier, accountants made manual ledgers which were taxing. Over the years, computer applications have computerized the process to save time and minimize errors.

General Ledger Vs General Journal

As 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.

FAQs

Recommended Articles

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 –

• Full Form of GL
• Accounts Payable Ledger
• General Ledger vs Trial Balance
• Ledger in Accounting