November 15, 2022 November 15, 2022/ Steven Bragg
A general ledger is the master set of accounts that summarize all transactions occurring within an entity. There may be a subsidiary set of ledgers that summarize into the general ledger. The general ledger, in turn, is used to aggregate information into the financial statements of a business; this can be done automatically with accounting software, or by manually compiling financial statements from the information in a trial balance report (which is a summarization of the ending balances in the general ledger).
How a General Ledger Works
The general ledger contains a debit and credit entry for every transaction recorded within it, so that the total of all debit balances in the general ledger should always match the total of all credit balances. If they do not match, the general ledger is said to be out of balance, and must be corrected before reliable financial statements can be compiled from it.
The general ledger is comprised of all the individual accounts needed to record the assets, liabilities, equity, revenue, expense, gain, and loss transactions of a business. In most cases, detailed transactions are recorded directly in these general ledger accounts. In some cases where the volume of transactions would overwhelm the record keeping in the general ledger, transactions are shunted off to a subsidiary ledger, from which just the account totals are recorded in a control account in the general ledger. In the latter case, a person researching an issue in the financial statements must refer back to the subsidiary ledger to find information about the original transaction. The general ledger is usually printed and stored in an organization's year-end book, which serves as the annual archive of its business transactions.
General Ledger Account Numbering
General ledger accounts are assigned unique identifying account numbers. These numbers may range from a simple three-digit code to a more complex version that identifies individual departments and subsidiaries. Account numbers within the general ledger are typically configured so that all accounts summarizing into the balance sheet are listed prior to all accounts summarizing into the income statement.
Terms Similar to General Ledger
The general ledger is also known as the book of final entry.
November 15, 2022/ Steven Bragg/
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The accounting general ledger is a report that provides a detailed description of every general ledger account and the transactions that make up the balance in that account. The general ledger holds all the financial information used to create the income statement and balance sheet reports, and serves several main purposes in the financial operation of the business.
Research
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When reviewing financial statements, accountants may find fluctuation in financial activity outside the normal scope of operations. In addition, while preparing balance sheet reconciliations, accountants may discover an out-of-balance condition between the ending balance in a balance sheet account and the external source the account balance should equal. In both those cases, the accountant refers to the detailed transactions in the general ledger to identify activity that has been improperly recorded or has been recorded to the incorrect general ledger account.
Audit
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Whether a business owner conducts an internal audit or pays an accounting firm to conduct an external audit, the accounting general ledger is one of the most important items used to review the financial operations of the business. Auditors use the general ledger to see the detailed explanation of income and expenses to ensure everything has been properly classified. Auditors also use the general ledger detail to select items for further review. For example, an auditor may select a general ledger expense for office supplies and ask to see the invoice that created the expense item.
Auditors compare the total general ledger activity for income and expenses to the total activity on the income statement. The ending balance in asset, liability and owner equity accounts should equal the amounts reflected on the balance sheet.
Budget Preparation
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An annual budget is an important tool to help monitor and control the financial operations of a business. During the latter part of the accounting year, business owners begin preparation of an operating budget for the upcoming year. The operating budget is a forecast of all income and expense expected to take place during the upcoming year. While a business owner could create a budget simply by inflating the total income and expense of the current year by a preset inflationary factor, that method would not take into account extraordinary and one-time expenses that have been reported during the current year. The best method for creating a budget is using current income and expense in conjunction with a thorough review of the general ledger detail to identify one-time and uncommon income and expense transactions, so that those figures do not artificially inflate the upcoming year’s budget.
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In bookkeeping, a general ledger, is a bookkeeping ledger in which accounting data is posted from journals and aggregated from subledgers, such as accounts payable, accounts receivable, cash management, fixed assets, purchasing and projects. A ledger account is created for each account in the chart of accounts for an organization, are classified into account categories, such as income, expense, assets, liabilities and equity, and the collection of all these accounts is known as the general ledger. The general ledger holds financial and non-financial data for an organization.[1] Each account in the general ledger consists of one or more pages. An organization's statement of financial position and the income statement are both derived from income and expense account categories in the general ledger.[2]
Terminology
The general ledger contains a page for all accounts in the chart of accounts[3] arranged by account categories. The general ledger is usually divided into at least seven main categories: assets, liabilities, owner's equity, revenue, expenses, gains and losses.[4] The main categories of the general ledger may be further subdivided into subledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc.
The extraction of account balances is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement preparation process, to ensure the equality of the total debits and credits.[5]
Process
Posting is the process of recording amounts as credits (right side), and amounts as debits (left side), in the pages of the general ledger. Additional columns to the right hold a running activity total (similar to a chequebook).[6]
The general ledger should include the date, description and balance or total amount for each account.
Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system helps ensure that the general ledger is always in balance, thus maintaining the accounting equation:
Assets = Liabilities + (Shareholders' or Owners' equity) {\displaystyle {\mbox{Assets}}={\mbox{Liabilities}}+{\mbox{(Shareholders' or Owners' equity)}}}The accounting equation is the mathematical structure of the balance sheet. Although a general ledger appears to be fairly simple, in large or complex organizations or organizations with various subsidiaries, the general ledger can grow to be quite large and take several hours or days to audit or balance.[8][citation needed]
In a manual or non-computerized system, the general ledger may be a large book. Organizations may instead employ one or more spreadsheets for their ledgers, including the general ledger, or may utilize specialized software to automate ledger entry and handling. When a business uses enterprise resource planning (ERP) software, a financial-features module produces subledgers and the general ledger, with entries drawn from a database that is shared with other processes managed through the ERP.
References
- ^ "Accounting Term Concepts" (PDF). Archived from the original (PDF) on 27 December 2015. Retrieved 12 February 2017.
- ^ "National Curriculum Statement Accounting Guide Grade 10" (PDF). Archived from the original (PDF) on 22 April 2016. Retrieved 26 February 2017.
- ^ a b "Chapter 9.3 - General Ledger and Charts of Accounts". Accounting Scholar. Retrieved 28 February 2017.
- ^ "Inputs to Accounting".
- ^ "What is a Trial Balance?". Retrieved 5 March 2017.
- ^ "Posting to general ledger accounts" (PDF). Retrieved 26 February 2017.
- ^ Meigs and Meigs. Financial Accounting, Fourth Edition. McGraw-Hill, 1983. pp.19-20.
- ^ Whiteley, John. "Mr". Moncton Accountant John Whiteley CPA. Moncton Accountant John Whiteley CPA. Retrieved 3 July 2017.[permanent dead link]
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