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 43104

You May Also Like

  • Complexities in GL System

    Complexities in GL System

    Although technically a general ledger appears to be fairly simple compared to other processes, in large organizations, the general ledger has to provide many functionalities and it becomes considerably large and complex. Modern business organizations are complex, run multiple products and service lines, leveraging a large number of registered legal entities, and have varied reporting needs. 

  • Record to Report Process

    Record to Report Process

    Record to report (R2R) is a finance and accounting management process that involves collecting, processing, analyzing, validating, organizing, and finally reporting accurate financial data. R2R process provides strategic, financial, and operational feedback on the performance of the organization to inform management and external stakeholders. R2R process also covers the steps involved in preparing and reporting on the overall accounts. 

  • GL -  Periods and Calendars

    GL - Periods and Calendars

    In some of the ERP tools, there are more than 12 accounting periods in a financial year. This article discusses the concept of accounting calendar and accounting periods. Learn why different companies have different accounting periods. Understand some of the commonly used periods across different organizations and the definition & use of an adjustment period.

  • What is Accounting & Book Keeping

    What is Accounting & Book Keeping

    Accounting is a process designed to capture the economic impact of everyday transactions. Each day, many events and activities occur in an entity, these events and activities are in the normal course of business; however, each of these events may or may not have an economic impact. Events or activities that have an effect on the accounting equation are accounting events. 

  • Concept of Subsidiaries

    Concept of Subsidiaries

    A subsidiary is a company that is completely or partly owned by another corporation that owns more than half of the subsidiary's stock, and which normally acts as a holding corporation which at least partly or wholly controls the activities and policies of the daughter corporation.

  • GL - Errors & Reversals

    GL - Errors & Reversals

    Explore the concept of journal reversals and understand the business scenarios in which users may need to reverse the accounting entries that have been already entered into the system. Understand the common sources of errors resulting in the reversal of entries and learn how to correct them. Discuss the reversal of adjustment entries and the reversal functionalities in ERPs.

  • GL - Accrued Expenses

    GL - Accrued Expenses

    Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.

  • GL - Account Allocations

    GL - Account Allocations

    An allocation is a process of shifting overhead costs to cost objects, using a rational basis of allotment. Understand what is the meaning of allocation in the accounting context and how defining mass allocations simplifies the process of allocating overheads to various accounting segments. Explore types of allocations and see some practical examples of mass allocations in real business situations.

  • 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.

  • Concept of Representative Office

    Concept of Representative Office

    A representative office is the easiest option for a company planning to start its operations in a foreign country. The company need not incorporate a separate legal entity nor trigger corporate income tax, as long as the activities are limited in nature.

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

Subscribe to Our Newsletter


© 2023 TechnoFunc, All Rights Reserved