Posted by Early Growth
September 21, 2021 | 5-minute read (842 words)
The general ledger may not be the most exciting business component, but it’s the cornerstone of any accounting process. A financial ledger holds the records of every transaction your company has ever made. Any good accountant needs access to a company’s general ledgers to prepare financial statements of all kinds, but what is general ledger accounting? Understanding the general ledger and how it plays into accounting is critical when starting or maintaining any business, so let’s dive in.
What is a general ledger?
The general ledger definition boils down to records of assets, liabilities, revenue, expenses, and equity. While general ledger accounting does include accounting cycles, it will essentially cover the lifespan of an entire business from its inception. But what is general ledger bookkeeping in the modern age?
Previously, business owners would use general ledgers to double-check mistakes and errors to produce accurate financial statements. These days, accounting software does this automatically with your journal ledger.
Four primary components of a general ledger
When asking, “What’s a general ledger?” you need to know its four primary components, which are:
- Journal entry – Each entry includes a unique number posted to the account, as well as the entry date.
- Description – Every transaction must be described to properly categorize it.
- Debit/credit – Whenever a new entry is posted, a credit or a debit will be added.
- Balance – The balance is an ongoing total that’s updated following every new entry. After every month, your accountant will calculate an ending balance.
The account balances inside the journal ledger may be used to calculate a trial balance. At the same time, accountants must ensure that the number of debits matches the number of credits under double-entry accounting standards.
How does a general ledger work?
General ledgers are the foundation of any effective accounting cycle and work to properly organize and store financial data. The general ledger is the heart of the system, but there are also other sub-ledger accounts linked to it. For example, a company might post transactions to its chart of accounts. The larger the company, the more complex this becomes.
Within the sub-ledgers, all transactions are closed out and then summarized to the main financial ledger. Your accountant will then create a trial balance, which is a report of each sub-ledger’s balance, and then check for errors. With online accounting, much of this process is now automatic.
Using a general ledger: Accounting purposes
So what does all this mean in the practical world of accounting? The main function of general ledger accounting is to execute double-entry bookkeeping. What this translates to is that every financial transaction always impacts a minimum of two sub-ledgers. Every entry will also have one credit and one debit. Journal entries always include two columns, with debits on the left and credits on the right. If you take anything away from this article about accounting, keep this equation in mind:
Assets – Liabilities = Total Stockholders’ Equity
It’s the core of double-entry accounting and is used by every business today. The general ledger is essential for ensuring that credits and debits balance, so businesses are properly informed about the state of their finances.
General ledger example
The general ledger system is complex to explain yet easy to demonstrate. The point to always remember is that a journal entry must be posted for every transaction and will include both a credit and a debit. In this general ledger example, Furniture Systems Incorporated sold $50,000 of goods to a major office building on June 16th, 2021. So what would this look like when it’s posted?
First, we have the entry to the general journal:
- 06/16/21 – cash, sales, goods sold for cash - $50,000 - $50,000
- Two entries for $50,000 were added because this transaction is both a credit and a debit to different sub-ledger accounts. So, what would this look like if it were posted to general ledgers?
- cash account – 06/16 - $50,000 debited
- Within the sales account, it would look like this:
- sales account – 06/16 - $50,000 credited
As you can see, while the general journal illustrated the primary transaction, it’s the ledgers detailing each sub-ledger that balances everything out. At a glance, accountants can look over what’s happened over a period of time and create accurate financial statements. Even better, modern online accounting services will handle most of the posting to various ledgers and sub-ledgers automatically. Some of the more advanced packages will even generate financial statements at the end of every accounting cycle.
Every business needs to use ledgers to meet the standards of double-entry bookkeeping and accounting. If managing credits, debits, and trial balances isn’t your thing, why not call in the experts? At Early Growth, we provide virtual and to help you get your financial ducks in a row. Spend less time on accounts and more time on doing business with our help. To learn more about getting help with your accountancy needs, contact Early Growth now.