General Ledger

A general ledger is an accounting record that compiles every financial transaction of a firm to provide accurate entries for financial statements. The double-entry bookkeeping requires the balance sheet to ensure that the sum of its debit side is equal to the credit side total. A general ledger helps to achieve this goal by compiling journal entries and allowing accounting calculations.

• A general ledger records, and balances all the transactions that affect an organization’s balance sheet and income statement.  
• The accounting steps start with recording financial transactions in a general journal. Thereafter, journal entries are taken to the general ledger that balances separate accounts such as cash, salary for the trial balance. The balance sheet and income statement are prepared using the trial balance.
• The ledgers allow balancing of the debit and credit balances of all accounts using subtractions and additions. This helps in computing how much assets, liabilities or revenue sources, etc. are left with an organization at the end of an accounting year. Using this computation, an organization's balance sheet remains free of accounting errors.
• Earlier, accountants made manual ledgers which were taxing. Over the years, computer applications have computerized the process to save time and minimize errors.

Preparing a general ledger is a crucial step in the accounting process. An organization initially records every financial transaction in a general journal, where the entries are called journal entries. The next step involves classifying journal entries as separate accounts in a general ledger.

Resultantly, there will be a cash account, salary account, payables account, etc. Thereafter, relevant debit or credit amounts will be noted in the account’s ledger. Then, debit and credit values will undergo further calculations to arrive at a final balance of different accounts.

Ledger balancing assists in computing how much assets, liabilities or revenue sources, etc., are left with an organization at the end of an accounting year. Using this computation, an organization prepares its financial statements.

After the ledger entries, the balances of all the ledger accounts are taken to the trial balance sheet. A trial balance is a worksheet with the column of debit and credit corresponding to the rules of double-entry bookkeeping or dual aspect of accounting.

As per bookkeeping rules, every financial transaction affects two accounts, causing them to either gain or lose something with equal amounts. Goods purchased with cash will cause goods to be debited as an asset while cash getting credited to finance the purchase.

Trial balance holds the balance of all the ledger accounts. If bookkeeping and accounting are done correctly, the sum of the trial balance's debit side and credit side will match. If it doesn’t, it is an indication of discrepancies or errors and will require rectification.

Only after the balances match, the accounts will be considered for loss or profit calculations using expenses and revenues in the income statement. Also, assets, liabilities, owner’s equity, expenses, and revenue amounts will be taken to the balance sheet. The debit balance and credit balance should match as the accounting rules require the asset side total to be equal to the sum of all the credit side entries as assets = liability + owner's equity.

The format or template of a general ledger usually includes the following details -

1. Account – In this column, we need to mention the account whose ledger we are creating, for example, the cash account.
2. Account number and page number – Relevant entries need to be entered here to favor easy compilation.
3. Date – Contains the date of the transaction.
4. Description – Describes the details of the transactions.
5. Debit Amount – All the debit entries of the account need to be recorded in this column.
6. Credit Amount – All the credit entries of the account need to be recorded in this column.

Example #1

On July 16, 2019, USA company sold goods to customers for cash $55,000.

Below is the transaction’s journal entry. We have also provided the two accounts’ ledgers in which the journal entry will be posted.

Example #2

On January 1, a firm received $10,000 from a debtor. On January 9, the firm purchased some goods with $4000 cash. Also, the business paid $1000 rent on January 11. Prepare ledgers for all the three accounts.

Solution

• Receiving cash from the debtor will increase the cash balance, which will be a debit entry. Cash payments for rent and goods will be a credit entry as the cash balance will go down.
• The debtor will be credited as the giver of cash.
• The goods being an asset will be debited after the purchase.
• Rent as an expense will be debited.
• After subtracting credit balance from debit, the business will be left with a debit balance of $5000 cash.
• Debtor, goods and rent had no adjustments as they were single entries.
• The balances after adjustments will be taken to the respective credit or debit side of the trial balance.
• Balance adjustments in the general ledger normally occur at the end of an accounting year. Some firms also opt for monthly adjustments.

Cash Account

Debtor Account

Goods Account

Rent Account

A general ledgers fulfills many functions which are listed below -

1. One can’t imagine a balanced trial balance without proper preparation of general ledgers.
2. We cannot prepare financial statements such as trading, profit & loss account and balance sheet if we don’t follow the ledger accounting system.
3. It helps get the detailed breakdown of daily financial transactions occurring in a business, which can be used for various types of statistical analysis. For financial decision-making, such compilation is of utmost importance.
4. Ledgers in accounting help in keeping a complete audit trail sequentially and logically. Besides, they ensure adherence to standard accounting norms. This assists in internal and external audit compliance.
5. Sale, purchase of goods, revenue, expenses, stock movements, and profitability of different years can be compared for trend analysis. Comparing reports across years can measure the current business status to arrives at remedial measures for efficiency.
6. We can easily ascertain the trade credit and amount receivable from our debtors and prepare an analysis to make necessary changes in the accounting books.
7. Earlier, accountants made manual ledgers which were taxing. Over the years, computer applications have computerized the process to save time and minimize errors.

As discussed before, the financial entries are first recorded in a general journal. For example, goods purchased with cash will be recorded in the the general journal as a journal entry. The journal entry will debit goods as an asset and credit cash as it will be going out or reducing to purchase the goods.

After the journal entry, the debit and credit amounts will be taken to the respective ledger accounts of cash and goods. Here the entries will be balanced to be taken to financial statements.

As such, the journal and ledger both have the most crucial roles in an accounting process to ensure that no transaction is missed out. For any details on the transaction, confusion or rectification, accountants refer to these two books of accounts.

This has been a guide to what is a general ledger. Here we discuss the types of General Ledger along with practical examples, advantages, and disadvantages. You can learn more about financing from the following articles –

• Full Form of GL
• Accounts Payable Ledger
• General Ledger vs Trial Balance
• Ledger in Accounting