General Ledger Accounting

The Definition of a General Ledger

A general ledger represents the record-keeping system to sort, store, and summarize a company’s transactions throughout an accounting period. These transactions are sorted by type of accounts and used to prepare the company’s financial statements.

General Ledgers are typically broken down into these account types:

  • Assets
  • Liabilities
  • Stockholders’ equity
  • Operating Revenues
  • Operating Expenses
  • Non-operating revenues and gains
  • Non-operating expenses and losses

The Purpose of a General Ledger

You don’t build anything without a strong foundation and that’s what a General Ledger is, a foundation used by accountants to store financial data organizationally to create financial statements.

Financial transactions make up a General Ledger and are posted into their own sub-ledger accounts that are defined by the companies. These sub-ledger accounts fall under the types listed about, such as assets, liabilities, stockholders’ equity, etc.

The transactions are closed out and summarized into the general ledger accounts. The accountant or bookkeeper then uses a trial balance to check for errors and posts addition entries as needed.

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Chart of Accounts

As mentioned earlier, the sub-ledgers that define the companies’ transactions are also known as the Chart of Accounts.

“The chart of accounts allows you to find the name of an account, its account number, and perhaps a brief description. It is important to expand and/or alter the chart of accounts to accommodate the changes to an organization and when there is a need for improved reporting of information.”

-Harold Averkamp

Double Entry Accounting

Since the discovery of double-entry accounting, it has been used by every type of business, no matter their size.

The practice of double-entry accounting records every transaction twice into a debits and credits column. This ensures each transaction affects at least one debit and credit column.

Double-entry transactions, or journal entries, are posted in two columns with debits on the left and credits on the right. The total of the debits and credit entries must balance.

Types of General Ledger Reports

Data that comes from the general ledger can be used to produce a variety of reports to show the status of a company’s finances. Two of the more frequently used reports are the Balance Sheet and the Income Statement.

Reports can be used by financial institutions, investors, owners, and shareholders to analyze the well-being of the business over time.

Reports coming from the data provided by the G/L can also be used to identify errors or possibly even fraud.

General Ledger Account alongside Accounts Receivable

The General Ledger Account and Accounts Receivable are two important components of an organization’s financial accounting system.

The G/L Account is a record of all the financial transactions that occur in an organization, including those related to Accounts Receivable.

Accounts Receivable, on the other hand, refers to the amount of money that a company is owed by its customers for goods or services provided.

The G/L Account helps to keep track of the payments received from customers, which are recorded as debits to the Accounts Receivable account.

This allows organizations to have an up-to-date record of their outstanding receivables and helps to ensure that all customer payments are properly accounted for in the organization’s financial statements.

Most accounting software platforms offer you ways to implement these setups.

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