General Ledger - Explained
What is a General Ledger?
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Table of ContentsWhat is a General Ledger?How is the General Ledger Used?Components of General LedgerThe accounting equation:Academic Research on General Ledger
What is a General Ledger?
A company keeps a detailed record of its financial transactions in a specific format. This format is called General Ledger in the language of accounting. It consists of all types of accounting data a company may have, including assets, capital, liabilities, expenses and income. General ledger acts as a central depository for accounting information collected from sub-ledgers, for example, stock, cash in hand, accounts receivable A/R, customer deposits, accounts payable A/P, etc.
How is the General Ledger Used?
The general ledger is basically the set of these accounts with debit and credit history that are validated by a trial balance to prevent mathematical errors. The Trial Balance is the bookkeeping worksheet with balances from all the accounts prepared periodically. Transactions are posted to the general ledger accounts, and the trial balance is generated. A summary is also created which is basically a report listing all the accounts and each accounts balance. This listing of account names is called the chart of accounts.
Components of General Ledger
A general ledger employs double-entry bookkeeping method. This means that each financial transaction affects at least two general ledger accounts. It also means that each entry has a debit and credit transaction. For example, for a $100 invoice and payment from a client, cash account will increase by $100 while the receivable account is reduced by the $100. Thus, the accounts are balanced. Double-entry transactions are posted in two columns, with debit entries on the left and credit entries on the right, and the total of all debit and credit postings are balanced. There are additional columns to the right which hold a running activity total. The general ledger also includes the date, description, balance or total amount for each account as well. The general ledger accounts are usually divided into seven main categories including assets, equity, revenue, liabilities, gains and losses. They may be subdivided into sub-ledgers for more details such as cash accounts, accounts receivable, accounts payable etc.
The accounting equation:
Assets = Liabilities + (Shareholders or Owners equity) is balanced using the double-entry bookkeeping system because with each entry, it debits from one account and credits into another account with equal amount. Although, principally, the general ledger appears to be simple and straightforward and looks easy to maintain, in large and complex organizations, the general ledger can be quite large and vast and can take a lot of time to balance and audit.