General Ledger Definition, Importance, Account Types

General Ledger Definition, Importance, Account Types

15 iunie 2020
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In accounting, a General Ledger (GL) is a record of all past transactions of a company, organized by accounts. General Ledger (GL) accounts contain all debit and credit transactions affecting them. In addition, they include detailed information about each transaction, such as the date, description, amount, and may also include some descriptive information on what the transaction was. An expense account is a record of the business expenses incurred by a company during a specific accounting period.

If you deplete other assets, or if you add liability or equity, those transactions are credits. Today, there is a number of accounting software packages that allow journal transactions to be easily transferred into the general ledger accounts. An accurate ledger is also a good safeguard against issues like embezzlement and fraud. If there’s an error and your books are out of balance, you’ll need to go back to make changes and create an adjusted trial balance or adjusting entries. Double-entry bookkeeping uses a ledger to track credits and debits with a trial balance to assure that everything is accurately tracked. By recording each transaction correctly, your trial balance should show equal credits and debits.

The general ledger is a record of all the company’s financial transactions. It includes accounts for assets, liabilities, owner’s equity, income and expenses. Furthermore, one of the most notable functions of the nominal ledger is to perform bank reconciliation. This is the process of checking whether a company’s bank transactions match its accounting records.

The income statement will also account for other expenses, such as selling, general and administrative expenses, depreciation, interest, and income taxes. The difference between these inflows and outflows is the company’s net income for the reporting period. In this instance, one asset account (cash) is increased by $200, while another asset account (accounts receivable) is reduced by $200. The net result is that both the increase and the decrease only affect one side of the accounting equation.

Therefore, your or your accountants go through each of the accounts individually if you prepare Journal and Ledger manually. Your General Ledger records transactions under different account heads. Thus, General Ledger Reconciliation helps you to ensure accuracy of the information contained in your General Ledger Accounts. Furthermore, the assets are categorized into current assets and fixed assets.

Is a General Ledger Part of the Double-Entry Bookkeeping Method?

There are two types of general Ledger such as the nominal ledger and the private ledger. It is the foundation of accounting, and it is vital to accurately understand how it works to track a company’s financial position. The accounts receivable account is a record of money that is owed for products or services that have been delivered but have not yet been paid. When a company sells products or services on credit, the accounts receivable account increases, and when the debt is repaid, the account decreases. The most common types of fixed assets are property, plant, computers and equipment. The General Ledger can be kept in either a manual or electronic accounting system.

  • In the olden days, before computers and software, accountants and bookkeepers recorded every financial transaction by hand.
  • Thus, with the Trial Balance, you can verify the accuracy of your accounts and prepare final accounts.
  • This is more like the God of all ledgers because it has been part of accounting for decades now.

We already covered how general ledgers let you view activity over specific time frames. However, a general ledger allows you to create better financial statements faster overall. Later in the accounting cycle, you create a trial balance with the general ledger to ensure everything balances. Most general ledgers also include columns for each debit and credit amount and a brief transaction description. In the olden days, before computers and software, accountants and bookkeepers recorded every financial transaction by hand. Businesses had books and binders full of paper, each one containing dozens of transactions.

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Sub-ledgers within each account provide details behind the entries documented in account ledgers, such as if they are debited or credited by cash, accounts payable, accounts receivable, etc. A subsidiary ledger (sub-ledger) how to calculate gross profit margin is a sub-account related to a GL account that traces the transactions corresponding to a specific company, purchase, property, etc. If a GL account includes sub-ledgers, they are called controlling accounts.

Classification of General Ledgers

The debit and credit format makes the ledger look similar to a trial balance. Other ledger formats list individual transaction details along with account balances. For the most part, general ledgers included with accounting software come pre-built with the most common account types (Figure A).

What are the terms of a General Ledger?

It records all the transactions that take place between you and your debtors. Here, debtors are nothing but the business entities to whom you have sold goods that you manufacture. In other words, you record transactions under the individual General Ledger accounts to which such transactions relate. Further, these transactions are recorded based on the Duality Principle of Accounting. Say you own a publishing house Martin & Co. and purchased 20 kg paper on cash at $20 per kg on December 1, 2020. Therefore, the following is the journal and ledger that you need to record into books for such a transaction.

How you access the general ledger

These are posted to control accounts, which essentially summarize the total amounts from these subledgers without the nitty-gritty details. A general ledger almost resembles a T-shaped account with entries on debit and credit sides. While debits show an increase in assets or expenses, credits indicate a decrease in assets (or, often, a boost in liabilities or revenue). Make it a habit to post journal entries to reflect all financial transactions regularly, including but not limited to revenue, expenses, and asset/liability adjustment.

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Your general ledger might break these down into accounts for rent, merchant fees, software subscriptions, telephone and internet, cleaning, and so on. Accounts receivable (AR) refers to money that is owed to a company by its customers. The accounts receivable process begins when a customer purchases goods or services from a company and is issued an invoice. The customer usually has a set amount of time to pay the invoice, such as 30 days.

The general ledger (also called a general journal or GL) summarizes all the financial information you have about your business. A cash book functions as both a journal and a ledger because it contains both credits and debits. Because a cash book is updated and referenced frequently, similar to a journal, mistakes can be found and corrected day-to-day instead of at the end of the month. If your business doesn’t make enough purchases to warrant keeping them in its own ledger, you can include them in your general ledger. Equity is the difference between the value of the assets and the liabilities of the business.

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