General Ledger (GL) is the primary accounting record-keeping system that maintains the financial transactions of an organization. It is typically used by accounting and finance professionals to store and organize data about every transaction, financial statement, and balance sheet of a company. In this article, we will discuss general ledger in detail, what it is, how it works, its importance, and some of the tools used to create, maintain and analyze it.
What is a General Ledger?
The general ledger is the central repository for all financial transactions that a company or organization receives or makes, such as payments, purchases, sales, investments, and inventory changes. These transactions typically include information such as dates, account numbers, amounts, descriptions or memos, transaction types, and ledger codes, which are then recorded into various accounts within the general ledger.
A ledger can be said to be a collection of financial records that helps to capture all transactions that occur within the organization. The general ledger, in particular, is used to store and manage all financial transactions that an organization makes over a given period of time. All financial information of an organization is recorded in the general ledger, which is used to prepare financial statements that summarize the financial health of the organization.
The purpose of the General Ledger:
The primary purpose of the general ledger is to provide a complete and accurate record of a company’s financial transactions. The general ledger forms the foundation of an organization’s accounting system, and it is used to create financial statements such as balance sheets, income statements, and cash flow statements.
The general ledger provides a detailed record of all financial transactions, which can be used for various purposes, such as:
1. Financial Reporting: The general ledger is used to create financial statements and reports that provide insights into an organization’s financial performance.
2. Audit Preparation: The general ledger is used to prepare for external audits, as it contains all of the financial transactions that will be reviewed during an audit.
3. Budgeting and Forecasting: The data contained in the general ledger can be used to create accurate forecasts and budgets by analyzing past financial performance.
4. Tax filing: The general ledger is used to prepare and file tax returns by providing accurate financial transaction data that can be used to calculate tax liabilities.
How the General Ledger Works:
The general ledger consists of several accounts that are used to record the financial transactions of an organization. Each account in the general ledger represents a specific type of transaction, asset, liability, equity, revenue, or expense. Here are some of the accounts used in a general ledger:
1. Asset Accounts: These accounts represent all assets owned by an organization, such as cash, inventory, equipment, and property.
2. Liability Accounts: These accounts represent all the debts that an organization owes, such as loans, accounts payable, and taxes payable.
3. Equity Accounts: These accounts represent the capital or equity that an organization has, such as retained earnings, owner’s equity, or common stock.
4. Revenue Accounts: These accounts represent all the income earned by an organization, such as sales revenue, interest income, and rental income.
5. Expense Accounts: These accounts represent all the costs and expenses incurred by an organization, such as salaries, rent, utilities, and depreciation expenses.
To record a transaction in the general ledger, the following steps are required:
1. Identification of the accounts: The first step is to identify the accounts that will be affected by the transaction. For instance, if an organization received cash payment for a service it provided to a customer, the two accounts to be affected will be the cash account and the revenue account.
2. Journal entry: After identification, a journal entry is then recorded, which indicates the two accounts being affected, the amounts, the transaction date, and a brief description of the transaction.
3. Posting: The journal entry is then posted to the relevant accounts in the general ledger.
4. Balancing: The final step is to balance the accounts to ensure that the total amount in the debit and credit columns of each account matches.
Tools Used to Create and Maintain General Ledger:
1. Accounting Software: Accounting software is one of the most widely used tools for creating and maintaining a general ledger. Software such as QuickBooks, MYOB, Xero, and Sage are some of the popular accounting tools used for general ledger management.
2. Spreadsheets: Spreadsheets such as Excel, Google sheets are also used for general ledger management. They can help to organize data and create reports that provide insights into an organization’s financial performance.
3. Cloud-based Accounting: Cloud-based software such as Wave, Zoho, and Freshbooks help to create and maintain general ledgers online. This makes it easier to store and access information from anywhere, at any time.
4. Outsourced Accounting: Organizations that do not have the expertise and resources to maintain general ledger records can outsource this task to organizations that specialize in accounting services.
The Importance of the General Ledger:
1. Accurate Financial Reporting: The general ledger helps to facilitate accurate financial reporting by providing a complete and accurate record of all financial transactions. This ensures that financial statements are accurate, timely, and relevant.
2. Financial Control: The general ledger helps to provide control over an organization’s finances by ensuring compliance with accounting standards, policies, and procedures.
3. Track Performance: The general ledger helps to track an organization’s financial performance against its goals and objectives by providing accurate and timely financial information.
4. Decision Making: The general ledger provides insights into an organization’s financial health, which can be used to make informed decisions about investments, budgeting, and operations.
The Future of the General Ledger:
With the advancement in technology, the future of the general ledger is shifting towards automation, cloud-based solutions, and artificial intelligence.
1. Automation: Automation will help to automate routine tasks such as journal entry creation, posting, and reconciliations, allowing accountants to focus on analyzing financial data.
2. Cloud-Based Solutions: Cloud solutions will make it easier for organizations to access their financial data anywhere, at any time, and on any device. This will enable accountants and finance professionals to work remotely and collaborate more effectively.
3. Artificial Intelligence: Artificial intelligence will help to automate complex financial tasks, such as predicting cash flow, detecting fraud, and identifying trends, providing more accurate and insightful financial reporting.
In conclusion, the general ledger is an essential tool for every organization, as it provides a complete and accurate record of all financial transactions. The general ledger helps to facilitate accurate financial reporting, financial control, track performance, and decision-making, making it a crucial tool for any business. The future of the general ledger is shifting towards automation, cloud-based solutions, and artificial intelligence. This will help to improve efficiency, accuracy, and insights into an organization’s financial performance.
A general ledger is a form of accounting that expresses debits and credits in opposing sections. All transactions are recorded in the general ledger including transactions recorded in other books that may deal specifically with customer transactions, financing or asset appreciation. In a general ledger, debits are offset by credits. The general ledger is used to generate a balance sheet and profit/loss assessments. General ledgers are also useful to audit in the event that there is a discrepancy in the company finances.
What are subsidiary ledgers?
Subsidiary ledgers (subledgers) explain or express data in the general ledger to assist in general ledger accounting. An accounts receivable ledger, for example, can be used to check invoices from clients and ensure that the entries in the general ledger are correct. Subsidiary ledgers for accounts receivable will contain information such as invoice numbers, charges, credits, date and the balance paid or owed. There will be separate entries for each customer in the subsidiary ledger. Certain payments, such as financing from loans will not appear in a subsidiary ledger and will instead be posted directly to the general ledger. For all other expenses and income, expect to enter information on those transactions in these ledgers.
In terms of general ledger accounting, all individual accounts in the subsidiary ledger will be totally and compared against the account represented by the ledger. Therefore, the accounts payable and receivable ledgers must match the amount in the accounts payable and receivable accounts, otherwise, an audit is in order.
What is cooking the books?
Cooking the books is the informal word that describes fraudulently altering the general ledger to reflect nonexistent earnings. This will coax more investors to buy into the company, thinking that it is profitable. Cooking the books is achieved by misreporting revenue and concealing or delaying expenses. Cooking the books is an illegal action an investigated by the Securities and Exchange Commission. The 2002 Sarbanes-Oxley Act regulates securities markets and imposes criminal penalties for financial misconduct and defrauding investors.
Why is keeping a general ledger important?
There are a number of reasons to keep an organized general ledger, not the least of which is ensuring compliance with tax laws and having appropriate records in case of an audit. With the numerous expenses and assets involved in running a business, it is impossible to appropriately account for finances without a general ledger or other method of bookkeeping. General ledger accounting is the fastest way to store customer information and ensure that the accounts payable and receivable are balances and accurate. Failure to pay suppliers or collect on invoices sent to customers will impact your relationship with suppliers and hurt your business’s accounts receivable turnover, which will in turn affect the flexibility and liquidity of your business. Accounting principles will also mandate that certain steps are taken to keep books organized and businesses that work with other businesses will need to keep books in reciprocal condition so that other businesses feel secure in working with partners.