Xero accounting

What Is a General Ledger? How It Works, Importance, Examples

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. Most accounting software programs are pre-programmed with a general ledger and chart of accounts, including free software like Wave Accounting.

It gives you one place to view all your transactions

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 you use accounting software, the software itself should guide you through the process of reconciliation. (If you work with an accountant, they’ll perform the same process using whichever accounting software their firm works with.) Generally speaking, you’ll follow these steps to reconcile your ledger. This process should reveal any financial errors and help you catch transactions you forgot to record (or recorded incorrectly).

Benefits of general ledger reconciliation

  1. Furthermore, a General Ledger helps you to know the overall profitability and financial health of your business entity.
  2. General ledgers are organized into accounts, or types of transactions, which are listed in the general ledger’s chart of accounts.
  3. While you can definitely track income and expenses with FreshBooks Lite, you can’t break down transactions by account and you won’t have a general ledger to reconcile.
  4. By preparing a trial balance, you make sure your accounting is correct before creating financial statements for the accounting period in question.
  5. But, you can refer to the related subsidiary account if you need to check any detail regarding the sales made to a specific customer.

It contains all the information you need to generate crucial accounting reports, including your balance sheet, income statement and cash flow statement. In this step, you need to compare the previous accounting periods closing trial balances to the opening balances of the current period ledger accounts. Thus, you need to check the balances for balance sheet accounts like assets, liabilities, and stockholder’s equity. A general ledger is the foundation of a system employed by accountants to store and organize financial data used to create the firm’s financial statements. Transactions are posted to individual sub-ledger accounts, as defined by the company’s chart of accounts.

What is a general ledger in simple terms?

Furthermore, the assets are categorized into current assets and fixed assets. These are typically reported on the left-hand side of your company’s balance sheet. Thus, assets are items of economic value that can be converted into cash or cash equivalents.

This is because you record transactions under specific account heads in Ledger. So, the operating income includes sales revenue, income received as fees and commission, etc. This is because the details recorded in your ledger accounts provide sufficient details to file your tax returns. Furthermore, at the end of the accounting period, you close these Ledger Accounts.

Operating Expenses are the expenses that you must mandatorily incur to run the day-to-day operations of your business. Thus, these are the expenses without which you would not be able to carry out your core business operations. But, you can refer to the related subsidiary account if you need to check any detail regarding the sales made to a specific customer. This is because you can easily verify if various accounting items are classified and recorded accurately with the help of the given information.

As you can see, columns are used for the account numbers, account titles, and debit or credit balances. 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.

Accounts are usually listed in the general ledger with their account numbers and transaction information. Here is what an general ledger template looks like in debit and credit format. General Ledger Codes are nothing but the numeric codes that you assign to different General Ledger Accounts. These accounts help you in organizing the General Ledger Accounts properly and recording transactions quickly. For example, you need to record the rent expense every month if you take computers on rent and decide to prepay the rent in January for the next twelve months. This is so because you do not want to understate expenses in your financial statements for the next 12 months.

You may include individual assets and accounts like accounts payable and receivable, liabilities, inventory, and investments. This information is used to prepare financial reports, monitor finances, track cash flow, and prevent accounting errors or fraud. FreshBooks has everything you need, including journal entries, accounts payable, balance sheets, and more, freeing you up to work on growing your company and increasing profits. In the case of certain types of accounting errors, it becomes necessary to go back to the general ledger and dig into the detail of each recorded transaction to locate the issue. At times this can involve reviewing dozens of journal entries, but it is imperative to maintain reliably error-free and credible company financial statements.

Thus, with the Trial Balance, you can verify the accuracy of your accounts and prepare final accounts. In addition to this, your ledger contains detailed information with regards to every transaction. For instance, your Purchase Ledger contains the following supplier details.

This is because you or accounting professionals are no longer required to go through the pain of recording the transactions first in the Journal and then transfer them to Ledger. This is done by comparing balances appearing on the Ledger Accounts to the original documents like bank statements, invoices, credit card statements, purchase receipts, etc. Unlike Operating Expenses, the Non-Operating Incomes and Expenses are one-time incomes or expenses that you earn or incur. Also, liabilities can be represented on the right-hand side of the balance sheet. So, liabilities can be further divided into current liabilities and non-current liabilities.

You can prepare financial statements once you have verified the accuracy of your ledger accounts. This feature automatically matches the transactions recorded in your books of accounts with the bank statement balances. Thus, such a record helps you in tracking various transactions related to specific account heads. Further, it also helps in speeding up the process of preparing books of accounts.

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business. It’s available to download in Google Docs, Google Sheets, XLS, DOC, and PDF, making it easier to see your business finances at a glance.

Further, the Duality Principle is expressed in terms of the below accounting equation. This means you first need to record a business transaction in your Journal. Remember, you need to record each of them in Journal in the order in which they occur. Once you record the transaction in the Journal, you are then required to classify and transfer it into a specific General Ledger account.

For instance, unlike FreshBooks’ higher-tier plans, its cheapest plan (FreshBooks Lite) doesn’t include double-entry accounting. While you can definitely track income and expenses with FreshBooks Lite, you can’t break down transactions by account and you won’t have a general ledger to reconcile. Plus, since the general ledger is essential to double-entry bookkeeping, it helps companies ensure financial accuracy.

Sub-ledgers (subsidiary ledgers) within each account provide additional information to support the journal entries in the general ledger. Sub-ledgers are great for accounts that require more details to review the activity, such as purchases or sales. Understanding what an accounting ledger is and its importance to your business finances can help you organize and track transactions more easily.

You may choose to conduct an internal audit or get your accounts audited by an accounting professional. Therefore, General Ledger acts as an important financial record that is audited whatever may be the case. As per this principle, there are at least two accounts involved when a particular transaction takes place.