A General Ledger is an account of the entire financial accounting of a company. The definition of general ledger extends beyond recordkeeping. Since many accounts are indicated in a GL, each account has its independent significance.
What is normally captured in the accounts of the general ledger comprises:
- Assets
- Liabilities.
- Equivalence.
- Cost
- Income or Revenue
The essential components required for efficient financial management are outlined here.
How general ledgers work
A general ledger uses the double-entry accounting method for developing financial statements. Double-entry bookkeeping maintains the balance equation, or accounting equation in balance, by documenting a debit and a corresponding credit. If your accounting is not balanced, something has gone wrong in the equation. The balance formula takes liabilities and owner’s equity and adds them up to determine a business’s assets. The balance equation formula is:
Liabilities + owner’s equity = assets
In double-entry accounting, all transactions must have at least one debit entry and one credit entry, and there will always be a balance in such accounts. The numbers of debit and credit entries do not necessarily need to be the same, so long as the trial balance is even.
Many confuse sub-ledgers and general ledgers. While they both bear the same final designation, “ledger,” this sameness does not imply that their meanings are the same. Rather, it is quite the contrary.
A sub-ledger is a detailed record of particular types of transactions, whereas a general ledger provides an in-depth view of the financial position and key performance indicators of an organization.
Some examples of typical sub-ledgers are as follows:
- Accounts Receivable: a balance owed to your business-an asset account
- Accounts payable: money your business owes— an expense account
- Cash: liquid assets your company owns, including owners’ equity—an equity account
- Inventory: Sales or purchases affecting your inventory-an asset account
The sub-ledgers you use will depend on the nature of your business. You are hiring the bookkeeper who is to work with you, whom you expect to organize all your finances using sub-ledgers tailored to your nature of business. Besides acting as an auxiliary to the general ledger, your chart of accounts carries all the names and descriptions of your sub-ledgers.
Lastly, let’s take a short detour in order to appreciate GL codes in the context of maintaining transaction records.
What is a GL code?
A General Ledger, often colloquially called a GL code, is an alphanumeric sequence unique to each financial entry under an entity’s ledger. Consider this- a Library in which your business’s financial transactions are stored- a “library call number”, or GL code. That is to say, it has a unique tag, which indicates the specific category to which a book belongs, guiding you to precisely what you seek. This “call number” serves the same purpose as a General Ledger Code. General ledger codes are the widely used accounting codes to classify and record all business transactions. They enable the enterprise to capture information regarding purchases, sales, and other related transactions.
Words that you should understand:
In that connection, one would expect that terms associated with a general ledger would be in pretty great demand. Some of the key phrases one might use:
Debit and Credit: This is an accounting system with every transaction affecting two accounts. It is how the accounts go up and down.
Chart of Accounts: That is the list that shows what is in your financial records. This lengthy list includes the services contained in your general ledger, which are generally categorized by division and department.
Journal Entries: This is where you write down each record of every transaction in the organization. Here, you will see all the important information from the date to the accounts involved. Trial Balance: This shows all the ledger accounts with their debit or credit balances. It is used to check that total debits are equal to total credits.
Fiscal year: A yearly period of 12 months used by both governments and business organizations to plan, plan, and report on their finances.
Balance Sheet Accounts; incorporate all assets (what the firm owns), liabilities (what the firm owes), and equity owned by stakeholders in an organization.
Income Statement Account: It is the account where all the operational transactions are entered, that is revenues and expenses.
Importance of a General Ledger
The general ledger wears many hats for your business’s finances. Just think of it as the huge bucket for all the financial details needed to make financial statements of your company. It actually comes from a source document, plus at least one journal entry for each and every financial transaction. A source document can be something such as an invoice or a canceled check that proves you did pay the bill.
Here are five reasons why the general ledger is important for your business:
Loan application: When your business needs a loan, the lenders will always require different financial records. The general ledger can help you to have all the information you may require at hand.
Balancing books: A general ledger is helpful in obtaining the trial balance. And this will help balance the books.
Preparation for an audit: If the Internal Revenue Service comes to check your records, it will not be as hard in case you have them all organized.
Fraud: It makes you easily identify fraud or any other issue concerning your records because it is easy to read and understand. Internal and external communication: The general ledger contains all the information required to prepare your financial statements for internal use like management and external use like investors or customers.
What are the elements of your General Ledger?
Setting up an accounting ledger is pretty simple. To set up and organize a general ledger to track the health of your business, follow these four steps:
Set up ledger accounts: These are assets, liabilities, equity, revenue, and expenses.
Create columns: It helps to create your ledgers in the double-entry style. This means you’ll need to create two sides on a ledger—one for credits and one for debits. Each side will have columns for the date, description, the ledger or folio number, and an amount.
Record transactions: As you carry out your business, record these transactions in the appropriate ledger, and at the end of your reporting period, you will then consolidate the data from all ledgers into a general ledger.
Prepare a trial balance: A trial balance is a list of all your debits and credits on your general ledger. Assuming that everything has been recorded and accounted for, then the balance of the credit columns and the debit columns must be equal to each other. When your trial balance equals, your books are balanced. Your ledgers should always bear information that will enable you to track the flow of money – its sources and its destinations – accurately.
How you access the general ledger:
In doing this you are essentially using your journal entries as your base ledger in Excel.
If you tend toward accounting software, most likely you will not use a general ledger but it offers you an automated report you can generate. Then the package you like probably will include an option “to view general ledger,” to see all the journal entries that you recorded in a particular time period. The headache of the general ledger has now gone when you hire a competent bookkeeper. They will make that work for you. However, if you have certain questions, your bookkeeper is always ready to walk you through your GL. All this means is that by the time your bookkeeper completes financial statements on your behalf, they are using the work done in the general ledger.
How often do you check and update your general ledger?
Up daily or weekly:
Every company ought to be updating its general ledger often regarding recent transactions. This will, for sure, keep the books up to date and report the financial position of that company at any given moment. This is especially more common where there are many transactions recorded.
Re-View Monthly:
It is a good practice to review the general ledger at month-end close. In reviewing the general ledger, an individual should look for mistakes or differences, verify all subledgers are indeed matching the general ledger, and that all transactions are proper. From this review of the general ledger, one prepares financial reports.
Accounting Software: Most accounting software updates a general ledger right away. This means that as soon as a transaction is entered, it goes straight to the general ledger.
Some software offers a feature called “batch posting”. In that case, the software will post a group of transactions at one time, but this usually happens when the business owners approve the batch, or else according to a pre-programmed schedule that has been coded into the accounting software. In either case, the general ledger is normally updated on a regular basis if accounting software is used. This will ensure the general ledger is up to date throughout the year.
How would you ensure correctness on your general ledger?
Companies can follow some steps to make sure that their general ledger is accurate:
Regular Appraisals
This ensures that all the transactions that have been recorded in the general ledger agree with source documents such as receipts and invoices. All the entries that are going to be made will also be accurate, therefore catching errors or discrepancies early on and thus correcting them right away.
Using Subledgers
The use of sub-ledgers gives a company more control and accuracy in its general ledger. Tracking details specific to an account and checking this against the corresponding account in the general ledger helps ensure accuracy, which helps in finding any problems.
Double-Entry Bookkeeping
The system of double-entry bookkeeping means that for each debit, there is an equal credit and vice versa. Thus, it will maintain a balanced ledger and pinpoint mistakes and differences as well. Segregation of Duties. For instance, the person writing the information in the general ledger would not be the same person looking at the ledger or approving their spending.
Use Accounting Software
Many tasks will be greatly facilitated using modern general ledger accounting software, thus leaving people fewer opportunities for errors. Even the software itself may contain rules that prevent incorrect or swapped entries.
