The Definition of a General Ledger
A general ledger represents the record-keeping system to sort, store, and summarize a company’s transactions. These transactions are sorted by type of accounts and used to prepare the companies financial statements.
General Ledger’s are typically broken down into these account types:
- Stockholders’ equity
- Operating Revenues
- Operating Expenses
- Non-operating revenues and gains
- Non-operating expenses and losses
The Workings 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.
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. 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.”
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 companies 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 GL can also be used to identify errors or possibly even fraud.