Overview: General Ledger
A one-line description for General Ledger would be, One of the most necessary accounting records for good business life. To simplify it, a general ledger is a kind of a full record of your business transactions. It includes all the debts you’ve processed since your company started. If you remember the age-old phrase, “keeping the books”, that also refers to managing a general ledger.
Maintaining a general ledger turns out to be fruitful if you utilize double-entry bookkeeping. It is the type of key tool that lets you keep an eye on all the expenditures and organize them into various categories so that your accountant and you can have access to a summarized, and comprehensive record of your financial transactions.
What is General Ledger?
To describe the meaning of a general ledger in a sentence, it is the base and foundational record of your whole business system. It is produced out of the accounting entries you’ve made. These accounting record entries are done for every business transaction your company pulls off and are then organized in proper order. Through a general ledger, you can keep a check on business transactions by entering them accordingly. The entries are to be taken from the accounting journals, mentioned in the credits and debits section, and then are put into individual accounts.
Your Chart of Accounts must have at least 5 accounts, and every entry is mentioned in one of the accounts. These charts of accounts can be the following:
- Revenue
- Liabilities
- Equity
- Assets
- Expenses
You can also have different sub-accounts under your general ledger and Chart of Accounts based on the complexity and size of your company.
Importance of General Ledger
It is safe to say that a general ledger helps big-time in managing your finances. The general ledger helps in different financial proceedings of your company. You can also think of it as an all-in-one cart.
It will carry all the important financial data you would need to sum up the official monetary statements for your company, and it is dependent on a foundational record, with a minimum of 1 diary entry for every fiscal transaction. An example of a source document can be any canceled check or an invoice that is evidence of a paid receipt.
Reasons for Importance of General Ledger
There are 5 major reasons why you should use a general ledger all through your business:
- Book Balancing: By using a general ledger you can use approximation and come at a temporary balance. This will help you in maintaining a book balance.
- Audit preparation: An audit can be held anytime by the Internal Revenue Service. So, using a general ledger it would be easy to go with the audit preparation as all your business records would be in one spot.
- Application for Loan: Loan lenders need various financial records, and to have them all in one place is very important. The general ledger will help you in keeping a track of your records so that when the need arrives, you have your data ready.
- Saves from Fraud: Using a general ledger detecting fraud becomes easy. You can also spot any other issue that has been prevailing in your accounting records. Having organized documentation will surely help you.
- External & Internal Connection: All the information which is mandatory to build your fiscal statements for the management or internal use, and also for the investor, external or customer use, is present in the general ledger.
How to Create a General Ledger?
The following are the requirements to build up a general ledger:
1. Make the accounts for General Ledger
5 entities are important to the general ledger. The divisions are holdings, debts, ownership, sales, and costs.
2. Move the Operations from the Journal Entry to the Accounting Journal
Transmit all monetary operations from the journal entry to the relevant accounting records, including all details.
3. Assign a number to each transaction.
Display the amount of the journal entry on the account in the general ledger in the “number” box. This enables cross-referencing.
4. The Gains & Outstanding debts
Make the necessary debits and credits to the respective accounts.
5. Maintain the balance
Maintain a daily total of the credit and debit balances so you can see if the account will equal once all of the activities have been recorded.
The general ledger subsequently becomes your company’s master accounting document, containing entries for the issuer’s name, credits and debits, and dollar value, as well as a continuous total.
There are several, accounting software systems available today that make it simple to transfer diary entries into accounts in the general ledger.
Example of a General Ledger
On 15th March 2020, XYZ Co. bought an inventory of $7,000 in cash.
On 16th March 2020, XYZ Co. made deals on capital $2,500, in which the price of the commodities was $500.
On 17th March 2020, XYZ Co. made $3,000 more deals on cash, in which the price of the commodities was $2,100.
The operations would be documented in General Journal as
| Date | Account No | Account Name | Debit | Credit |
|---|---|---|---|---|
| 15-Mar-20 | 1300 | Inventory | 7,000 | |
| 15-Mar-20 | 1400 | Cash | 7,000 | |
| 16-Mar-20 | 1400 | Cash | 2,500 | |
| 16-Mar-20 | 2100 | Sales | 2,500 | |
| 16-Mar-20 | 3100 | Price of goods sold | 500 | |
| 16-Mar-20 | 1300 | Inventory | 500 | |
| 17-Mar-20 | 1400 | Cash | 3,000 | |
| 17-Mar-20 | 2100 | Sales | 3,000 | |
| 17-Mar-20 | 3100 | Price of goods sold | 2,100 | |
| 17-Mar-20 | 1300 | Inventory | 2,100 |
Then the operations would be assigned to General Ledger as shown below:
| Cash | Sales |
|---|---|
| 15-Mar-20 – 7,000 | |
| 16-Mar-20 – 2,500 | 16-Mar-20 – 2,500 |
| 17-Mar-20 – 3,000 | 17-Mar-20 – 3,000 |
| Inventory | Price of goods sold |
|---|---|
| 15-Mar-20 – 7,000 | |
| 16-Mar-20 – 500 | 16-Mar-20 – 500 |
| 17-Mar-20 – 2,100 | 17-Mar-20 – 2,100 |
Difference between General Journal & General Ledger
Companies that employ double-entry bookkeeping as the only documentation of their monetary operations use the general ledger and general journal. The general ledger and general journal in a corporation have two distinctive elements: the general journal is the first spot where a monetary transaction occurs by a company, and the ledger is the second place where a monetary transaction is entered by a company.
In the general journal, a monetary transaction occurs sequentially. Financial transactions are documented in a per account manner when they are migrated to the ledger accounts.
If every bank account is in harmony, your accounting information will be as well when you prepare them after the time frame you specify. You can create accounting is based on these papers by following the financial statement situation.
Sub-ledgers for such 4 accounts are often found in the ledger:
- Cash Receipts Journal
- Purchases Journal
- Sales Journal
- Cash Disbursement Journal
Advantages of General Ledger
The multiple advantages of a general ledger are mentioned below:
Simple Trial Balance Production
A general ledger account balance is needed for trial balance so that it is easily made. Because of this, it’s very tough to make a trial balance without a general ledger.
Utilizing Double Entry Scheme
The double-entry scheme’s submission procedure can be finished only if the diaries are sent to individual ledger accounts.
Viewing Statistical Evidence
The ledger bank balances serve as a reference of statistical evidence for management to use in concluding. To obtain diverse accounting records for a business, the financial evidence given by the ledgers is consolidated, examined, and evaluated.
Reduce the likelihood of bookkeeping discrepancies
Because transactions are first recorded in a diary before being entered into the ledger, financial misstatements are less likely.
Analyzes a company’s total revenue and expenses
Distinct kinds of business costs and revenues are observed in different ledger accounts. As a result, it is easy to examine the quantity of revenue and spending for each category during a certain period.
To store and gather data
A ledger is an excellent tool for keeping multiple sorts of transaction data. A ledger can be used to arrange transactional data in the form of resources, debts, income, and expenditures. The trial balance, which is needed to construct annual accounts, balance sheets, as well as other critical accounting documents, is produced when every ledger is shut.
Read more: Cash Book, Ledger Balance
Disadvantages of General Ledger
The downsides of Ledger that everyone should be aware of:
- Because anyone may simply retrieve the journal or document from the computer, the ledger is not completely secure.
- These are very confidential documents that require extra precautions.
- It is based on the operations that have been documented in the logbook. If there are any errors in the transaction data in the book, the outcomes of transaction publishing in the ledger will be erroneous as well.
- Keeping a ledger takes a lot of time.
FAQ’s
These accounts record transaction information. It keeps track of all economic transactions conducted in a company.
The general ledger helps in different financial proceedings of your company. You can also think of it as an all-in-one cart.
The ledger documents are very confidential and need extra care to be kept safe.