What is General Ledger? Let’s say you’re preparing for your business, and your research about accounting took you here. Or maybe you’re changing your accounting method to double-entry bookkeeping. Whatever it is, if you’re seeking knowledge about General Ledger– this posts is what it’s all about.
General Ledger’s Purpose
The main purpose of a general ledger is for you and your accountant to find– in one location– a detailed, interlocking record of all of your company finances. But to be precise, for a company’s double-entry accounting system, the general ledger is its foundation. Its accounts contain all transaction details that are necessary to generate income statements, balance sheets, and other financial reports. This helps accountants, business managers, analysts, investors, and other stakeholders continuously evaluate the success of the organization. Entries in the sub-ledgers are summary transactions.
Note: The general ledger is different from the general journal. Journals are for the chronological recording of business transactions. The general ledger gets its entries from it.
Understanding the General Ledger Further
The general ledger is a book that records economic transactions. Transactions are posted to the ledger from the journals which are recorded using the double-entry accounting system of debits and credits– where debits simply mean left and credits mean right. Whether a debit indicates an increase or a decrease to a given account, it depends on the type of account. Let’s take a look at the important financial report that it generates.
The Balance Sheet
The balance sheet reflects a company’s control of assets and its obligations. Within the balance sheet, accountants group accounts that are normally debits together as assets. Accounts recorded are as liabilities or equity.
The Income Statement
The income statement reflects the time expenses that are either applied to or subtracted from the company’s earnings. Revenue is resources are expected to be received by the company in exchange for goods or services rendered. Expense is the cost of buying materials, paying employees, or any other type of purchase in order to generate revenue. In short, expenses are the cost of doing business.
Revenues increased through credits while expenses increased through debits. If the company is successful– revenues will exceed expenses, which means that the income statement will yield net credit balance. This net credit balance will transition to the balance sheet as equity– or to be exact– as retained earnings. This will cause equity to increase. The increase in equity will be a matched increase in assets. For example, if all sales and purchases in cash, the cash balance will increase hand in hand with retained earnings.
The general ledger is just the tip of the iceberg when it comes to your research on accounting for your business. Nevertheless, I hope this blog posts explain what is it exactly.
See Also: TRACK BUSINESS EXPENSES