What is a General Ledger?

What is a General Ledger?

The purpose of the general ledger is to sort transaction information into meaningful categories and charts of accounts. The general ledger sorts information from the general journal and converts them into account balances and this process converts data into information, necessary to prepare financial statements. This article explains what a general ledger is and some of its major functionalities.

Difference between Transactions & Financial Transactions:

As discussed earlier, the business enters into many activities and transactions throughout the day. It is not necessary that all activities have a financial impact. For example, if a company issues a Purchase Order for buying certain goods, but no financial transaction has happened unless the goods are delivered and the invoice is raised on the company issuing the purchase order by the supplier. All transactions that have a financial impact only need to be journalized. Transactions having a financial impact are only posted to General Ledger.

What is General Ledger?

Once we have journalized transactions into a general or special journal which are also referred to as "the book of original entry, the transactions need to be entered in the general ledger which is also called "the book of final entry." The general journal and the general ledger both record transactions, but it is the general ledger that groups similar transactions into accounts, and converts the accounting data into meaningful information useful for the stakeholders.

Transactions are first recorded in the general journal and then transferred, or posted, to the ledger, which stores all the charts of accounts of a business. An account is defined as an accounting record that reflects the increases and decreases in a single asset, liability, or owner's equity item (The Accounting Equation!!). In addition, the ledger shows the balance of each account that helps the user understand the final effects of the transactions.

While journals present a chronological listing of a company's daily transactions, ledgers are organized by account. As a result, financial statements such as Balance Sheets and Income Statements can only be generated from the general ledger not directly from the journals.

Accounts in a ledger are simply groupings of interest. Sub Accounts are created for five types of accounts Assets, Liabilities, Equities, Revenues, or Expenses. Separate records are created to classify these accounts further to help to understand the accounting data at a granular level. Based on the individual business needs the number and variety of sub-accounts (natural accounts) in a given business can vary significantly. In order to group account information more usefully, a company may use subsidiary ledgers as well as a general ledger.

Format of General Ledger:

The purpose of the general ledger is to categorize the information into accounts and provide the users with different account balances. This categorization ensures that the data is organized and easily accessible to convert them into trial balance and finally convert it to financial statements. As the rules of debit and credit and the accounting equation still apply, the summation of the balances of all the accounts in a General Ledger is always equal to zero, because for every debit in Journal we have also created a corresponding credit. The standard format helps organize financial information in one place.

Standard general ledger format generally contains the following information:

  1. The chart of accounts- classified into five account types - Assets, Liabilities, Equities, Revenues, or Expenses.
  2. The account's title is the name of the account and must exactly match the account name as defined in the master chart of accounts by the organization.
  3. The Date columns – A general ledger may capture several dates, like the entered date, transaction date, accounting date, and the posting date. These dates may be the same or may vary based on the business internal policies.
  4. The Particulars column explaining the nature and purpose of the transactions that are being captured against the respective accounts and amounts.
  5. The Post Reference (P.R.) column specifying the reference information to the posting event, tying the transaction back to the originating journal.
  6. The Debit column representing the amount of debit posted to the account.
  7. The Credit column representing the amount of credit posted to the account.
  8. The Debit Credit Balance (DR./CR.) column to indicate the sign of the final balance. Sometimes a negative (-) is used to represent credit balances.
  9. The Balance column which keeps a running balance of each account. Due to this balance column, the ledger is referred to as a "balanced column account."

A good general ledger software application will provide management with accurate, up-to-date information in order to make short and long term business decisions. It also has inbuilt controls and processes necessary, to ensure that the correct information is reported. Income statements, balance sheets, and statements of cash flow are standard reports needed by management to judge business progress and these reports can be built using the trial balance created in General Ledger.



Related Links

Creation Date Tuesday, 30 November -0001 Hits 42527

You May Also Like

  • Introduction to Organizational Structures

    Introduction to Organizational Structures

    Organizations are systems of some interacting components. Levitt (1965) sets out a basic framework for understanding organizations. This framework emphasizes four major internal components such as: task, people, technology, and structure. The task of the organization is its mission, purpose or goal for existence. The people are the human resources of the organization.

  • Equity and Liability Accounts

    Equity and Liability Accounts

    Funds contributed by owners in any business are different from all other types of funds. Equity is the residual value of the business enterprise that belongs to the owners or shareholders. The funds contributed by outsiders other than owners that are payable to them in the future. Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities are debts payable within one year.

  • Different Types of Organizational Structures

    Different Types of Organizational Structures

    Modern business organizations run multiple product and service lines, operate globally, leverage large number of registered legal entities, and operate through complex matrix relationships.  To stay competitive in the current global business environment, they must often develop highly diverse and complex organizational structures that cross international borders.

  • What is a Business Eco System?

    What is a Business Eco System?

    The goal of a business is to generate capital appreciation and profits for its owners or stakeholders by engaging in provision of goods and services to customers within the eco system/framework governed by respective laws(local/international).  The eco system involves various entities that the business works with for delivery of a product or service.

  • GL - Unearned / Deferred Revenue

    GL - Unearned / Deferred Revenue

    Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.

  • Driving Business Efficiency through Divisions and Departments

    Driving Business Efficiency through Divisions and Departments

    In case of a multi-divisional organizational structure, there is one parent company, or head-office. And that parent owns smaller departments, under the same brand name. Dividing the firm, into several self-contained, autonomous units, provides the optimal level of centralization, in a company.

  • The Accounting Cycle

    The Accounting Cycle

    Learn the typical accounting cycle that takes place in an automated accounting system. We will understand the perquisites for commencing the accounting cycle and the series of steps required to record transactions and convert them into financial reports. This accounting cycle is the standard repetitive process that is undertaken to record and report accounting.

  • Benefits of Automated GLs

    Benefits of Automated GLs

    The general ledger is the central repository of all accounting information in an automated accounting world. Summarized data from various sub-ledgers are posted to GL that eventually helps in the creation of financial reports. Read more to understand the role and benefits of an effective general ledger system in automated accounting systems and ERPs. 

  • Contra & Control Accounts

    Contra & Control Accounts

    There are five types of core accounts to capture any accounting transaction. Apart from these fundamental accounts, some other special-purpose accounts are used to ensure the integrity of financial transactions. Some examples of such accounts are clearing accounts, suspense accounts, contra accounts, and intercompany accounts. Understand the importance and usage of these accounts.

  • GL - Different Accounting Methods

    GL - Different Accounting Methods

    The accounting method refers to the rules a company follows in reporting revenues and expenses. Understand the two common systems of bookkeeping, single, and double-entry accounting systems. Learners will also understand the two most common accounting methods; cash and accrual methods of accounting and the advantages and disadvantages of using them.

Explore Our Free Training Articles or
Sign Up to Start With Our eLearning Courses

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved