What is a General Ledger? How GL Works in Accounting

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general ledger example

The best way to know if your general ledger is correct is to reconcile all entries then generate a trial balance to verify the completeness and ensure that debit balances equal credit balances. Having an easy-to-read general overview of your company’s finances and creating trial balances can help you spot unusual activity, or fraud quickly, so you can take action before a serious problem develops. You can also use the information on a GL to verify the accuracy of financial statements during internal reviews and audits. You also match general ledger account balances to source documents reciprocal in math definition rules examples facts faqs to see if the accounts are accurate. However, with online accounting software like QuickBooks, general ledger reconciliation has become a lot easier. In a general ledger, you can easily find information like a sales transaction, purchase transaction, etc.

Bookkeeping

As you can see, columns are used for the account numbers, account titles, and debit or credit balances. Other ledger formats list individual transaction details along with account balances. General ledgers use the double-entry accounting method, with each transaction in the ledger recorded in two columns, one for debit and another for credit. As mentioned earlier, journal entries represent a good portion of entries in the general ledger. Think of the general journal as the place to record all your raw transaction data, which then gets posted to the appropriate accounts, such as your accounts receivable and cash transactions.

Determine Which Features You Want To Include

general ledger example

A general ledger is the foundation of a system employed by accountants to store and organize financial data used to create the firm’s financial statements. Transactions are posted to individual sub-ledger accounts, as defined by the company’s chart of accounts. To correctly record an increase or decrease to an account within your business, you’ll need to use either debit and credit for the double-entry bookkeeping method.

Now that you’ve learned more about what a general ledger is in accounting, you’ll be better able to provide your accountant with the information they need to keep your books balanced. Compare your startup’s revenues and expenses on a month-by-month, quarter-by-quarter, and year-over-year basis with this startup business budget template. Enter expenses, such as wages or operational and marketing costs, and revenue sources, such as commissions, sales, and investments.

A general ledger is the second most important book of entry after the Journal, because you record transactions under specific account heads in Ledger. In this instance, a subsidiary ledger records detailed information of the related control account. A general ledger has four primary components, these include a journal entry, a description, debit and credit columns, and a balance.

There are many ways to separate the general ledger into groups of accounts with common characteristics, these are more fully discussed in our subsidiary ledgers in accounting post. For a small business the most common way to split the ledger is into four subledgers. At the month end the difference between the total debits and credits on each account represents the balance on the account. We discuss the process of balancing the account in our post on balancing off accounts. The business updates the ledger by copying each of the entries in the books of prime entry to the appropriate account in the ledger. The GL is a big part of your company’s overall financial picture, acting as an important repository of all your accounting data.

What does a general ledger include?

When a company receives payment from a client for the sale of a product, the cash received is tabulated in net sales along with the receipts from other sales and returns. The cost of sales is subtracted from that sum to yield the gross profit for that reporting period. QuickBooks’ intuitive accounting software helps provide a comprehensive audit trail. If you’re ever audited, you won’t have to dig through paper files to get organized. You can pull your general ledger report, specify an account, and review the details and supporting documentation (invoices, receipts, etc.). To see how the general ledger works in practice, let’s take a closer look at Crumbs Bakery and their financial transactions.

  1. The trial balance is checked for errors and adjusted by posting additional necessary entries, and then the adjusted trial balance is used to generate the financial statements.
  2. The account details can then be posted to the cash subsidiary ledger for management to analyze before it gets posted to the general ledger for reporting purposes.
  3. Using a GL will keep you up-to-date on your cash flow, debts, and spending, so you can watch for trends and make adjustments to your business operations to maximize profits over time.
  4. For each transaction, record the date, details, post reference, and debit and credit figures to keep an accurate record of all transactions.

Is a general ledger the same as a balance sheet?

On January 31, after all of the cash journal entries post, the general ledger lists the ending cash balance. Accounting ledgers can be displayed in many different ways, but the concept is still the same. Accounts are usually listed in the general ledger with their account numbers and transaction information. Each journal entry should have an account number, a date, a dollar amount, and a brief entry description. These detailed entries tell you the who, the what, the when, the where, and the why—leaving no room for confusion, thus creating clearer transaction explanations. This means that you don’t need to look through bank statements, invoices, or credit statements for a specific transaction when you have the general ledger at your disposal.