Accountants use a standardized record keeping system to monitor business transactions and economic events relevant to an organization. The general ledger can be kept in a spreadsheet, but it’s often a part of an accounting software package. Below are details and an example of the mechanics of a general ledger and how it fits into the accounting cycle.
What Is the General Ledger?
In accounting, there are permanent accounts and temporary accounts that are used to track financial activity. All the accounts in the chart of accounts are listed in the general ledger. Typical categories in ledger accounts include assets, liabilities, equity, revenues and expenses. It is the summation of all the debits and credits recorded by accounting clerks, bookkeepers and accountants. The debits and credits in the ledger accounts should be equal when using double entry bookkeeping.
In accounting software, the general ledger is a part of a database and uses double entry bookkeeping. When a journal entry is posted to the ledger, the debits and credits can be queried from the database to create financial statements, such as the profit and loss / income statement, cash flow statement and balance sheet. This is where all the recorded financial activity for a business is stored, and it is among the most important tools accountants have for tracking financial activity and making sure a business is profitable.
Why Is a General Ledger Used?
The general ledger is a mechanism to record relevant transactions and economic events related to a business. It is a source of data that can be used to form trial balances and ultimately a myriad of important financial reports, such as the cash flow statement. Without the general ledger, another system would be needed to house all the financial transactions that form the basis for financial reports. While the process of maintaining the ledger, posting journal entries and reconciling general ledger accounts may be time-consuming and labor intensive, the investment of time and labor is well-worth it.
Accountants often use the general ledger as a data warehouse to create ad hoc reports. For example, if an analysis and schedule of owner distributions is needed, the ledger can serve as a source of information to complete the analysis. Whether it’s an analysis of accounts receivable, accounts payable, revenue or expenses, the general ledger is a vital source of information. If accountants couldn’t query the general ledger accounts, it would be difficult to verify the accuracy of financial statement account balances or understand why variances exist over time.
General Ledger Example
All the permanent ledger accounts on the balance sheet and all of the temporary accounts on the income statement are reflected on the general ledger. The account is divided by categories and are listed in the same order as are on the balance sheet and income statement. Assets are the first category on the balance sheet, so assets are the first division for your ledger. Liabilities, owners equity, revenue and expenses are the second through fifth categories of division.For example, activity for asset accounts such as cash, fixed assets, inventory and accounts receivable are recorded on the ledger. Similarly, activity for liabilities such as accounts payable and notes payable are also listed. All of the debits and credits that will form the financial statements are moved from journals and subsidiary ledgers to the general ledger.
There are a variety of accounting systems that contain a general ledger. These systems include QuickBooks, Sage, Oracle and Peoplesoft among many others. The ledger is in many ways indistinguishable from the other modules and reporting features in the software package. However, it is important to remember that the general ledger still exists and the function it plays in the generation of financial statements.
Posting Entries to the General Ledger
When posting entries to the general ledger accounts, all journal entries must have equal debits and credits. This is an important first step in preparing entries for posting. In traditional accounting systems, journals are created and posted to subsidiary ledgers. The subsidiary ledgers are then posted to a general ledger.
The system takes all journal entries and posts them to the general ledger in a seamless transaction. All entries are posted to the ledger, and the system will typically let users query the system for transaction activity. The posting process shouldn’t be done unless journal entries have been reviewed and approved according to a company’s internal control structure. Otherwise, errors and omissions may occur that may ultimately materially misstate the financial statements.
Differences Between the General Journal and the General Ledger
General journal accounts serve as the initial recordation tool for a journal entry. It is a tool used in a traditional accounting system, and it helps bookkeepers remain organized. Journal entries are listed by journal number. While this collection of debits and credits is important, it is less relevant when using accounting software. The software takes the entries and posts them to the ledger in behind-the-scenes actions.
The general ledger is the summation of all journal entries listed by account, while the trial balance only contains the ending balance in each of those accounts. All debits & credits are illustrated for all permanent and temporary ledger accounts. The general journal forms the basis for the general ledger, and forms the basis for the financial statements. Given the reality of accounting systems, the ledger is the most relevant tool for tracking transaction information and querying the system, to monitor account activity and generate financial reports.
The general ledger is also one of the most important tools accountants use to track critical ledger accounts, such as the operating cash account or COGS expense accounts. The ledger must be maintained on a regular basis by professionals that understand the accounting cycle and how to post a journal ledger entry. Without the general ledger, it would be extremely difficult to create a trial balance, financial statements or for shareholders to understand a company’s financial position.