accounting

What is an Accounting Ledger?

Accounting ledgers are an essential aspect of small business bookkeeping. As a small business owner, you need to be aware of all the transactions your business has completed in an accounting period. That’s where the ledger comes into play.

Financial statements like income statements, balance sheets, and cash flow statements show the financial health of a business. Business owners can generate all three statements using the accounting cycle, which includes the general ledger. The accounting cycle has four steps:

  1. Gather source documents. Transactions post from source documents like receipts and invoices. Each accounting document is used to post a journal entry.
  2. Post journal entries. A journal entry includes an account number, a date, a dollar amount, and a description of the entry. In some cases, accountants post information to control accounts and then transfer the data into a journal entry.
  3. Record entries in the general ledger. The journal entries post to the general ledger. While some small businesses use Excel, accounting software is a more efficient way to maintain general ledger accounting records.
  4. Generate financial reporting. To produce the financial statements, the accountant generates a trial balance that lists each account and the current balance. You can use an adjusted trial balance to generate financial reports.

In financial accounting, a company’s main accounting record is its general ledger. Although there are tools that automatically categorize these transactions, it’s still important to know the basic components of general ledger accounts. Knowing the components means you can spot potential issues in your financial data.

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Accounting Ledgers Defined

An accounting ledger is part of the bookkeeping system where a business records all its financial transactions. A business will create separate categories for such transactions- these are known as accounts. All accounts of a company will be listed and contained within the general ledger, or principal book of accounts.

A general ledger has four primary components: a journal entry, a description, debit and credit columns, and a balance.

  1. A journal entry: The number of each journal entry posted to the account and the date of the entry.
  2. A description: A description of the transaction.
  3. Debit and credit columns: Each journal entry posts a debit or credit to the general ledger.
  4. A balance: A general ledger lists the account balance each time a debit or credit posts to the account. At month-end, after all the journal entries post, the ending balance is calculated.

You can use the account balances in the general ledger to generate the trial balance. A trial balance lists every account and the current account balance. The dollar amount of total debits must equal total credits in the double-entry accounting system.

The general ledger must include all accounts of a business that will appear on their financial statements at the end of an accounting period. These are known as general ledger accounts (GL accounts). The five key GL account types are as follows:

  1. Assets
  2. Liabilities
  3. Equity
  4. Revenue/ Income
  5. Expenses


What is the Purpose of an Accounting Ledger?

All financial transactions of a company must be accounted for. The GL accounts will possess a list of all transactions involving that specific account. These entries will correspond with the company’s journal entries– which record all increases and decreases to accounts.

Every accounting period, these entries and account listings are compiled into the essential financial statements of a business, including the balance sheet and income statement. It is these documents that reflect the overall financial position of a company. Such information is used internally and externally to measure the success of a business and ensure that all dealings meet governing body regulations.

Subsidiary Ledgers and Control Accounts

As the general ledger contains all accounts associated with the business, these accounts are sometimes so large that they need to be broken down into further detail. This is where subsidiary ledgers come into play. A separate subsidiary ledger is created for the recording of these lower-level accounts.

A general ledger account that holds all subsidiary ledger accounts is known as a control account.

What are the Different Types of Ledgers?

The most common book of accounts for any business will be the general ledger, the sales ledger, and the purchase ledger. Within these ledgers will sit the accounts associated with them. The purchase ledger is also known as the accounts payable ledger. Even though it lies within the Liabilities account, there are so many corresponding journal entries and transactions associated with the accounts payable, that it typically needs an entire ledger to track such things.

Chart of Accounts

Within a general ledger contains a chart of accounts. This chart is a list of all accounts that can be found within the ledger, and that are used by the business. Below is an example of the different accounts that are contained within a general ledger.

By no means are these the only accounts that will show up in the ledger. As a business has an expansive list of accounts, you will need to make as many as required to track all types of transactions. For example, the asset accounts could contain cash in hand, cash in bank, accounts receivable, prepaid expenses, real estate, machinery, inventory, and more.

general ledger flow chart

How do you fill out an accounting ledger?

To correctly record an increase or decrease to an account within your business, you will need to use a debit and credit for the double-entry bookkeeping method. This is a principal method of accounting in which transactions are recorded in at least two journal entries- a debit to an account and a corresponding credit to an account.

Here are the steps you need to take to fill out an accounts ledger:

  1. Create a ledger per account type, filling out the account and account number
  2. Add columns for the date, journal reference or number, and description
  3. Another column for the debits, credits, of the transaction and the balance
  4. Take the journal entry information and re-enter into the corresponding account
  5. Record all transactions and adjust entries when needed
  6. Combine all account information to create a ledger

Accounting Ledger Example and Template

general ledger template

Download this free general ledger template.

Let’s review the cash general ledger account for Centrefield Sporting Goods. Account #1000 is the cash account. It’s a partial listing of the general ledger for January 2020. The ledger reports each journal entry that impacted the cash account. Note the following:

 

  • The January 1 beginning balance is $80,000, and the balance matches the December 2019 ending cash balance.
  • The debit balances and credit balances post in separate columns.
  • Purchases made on January 1 and January 5 decrease the cash account. Journal entry #1 indicates that inventory is debited (increased) by $10,000, and cash is credited (reduced) by $10,000. If you checked the inventory general ledger account, you’d also find journal entry #1.
  • A customer makes a cash payment on January 9, and the cash account increases with a $6,000 debit.

On January 31, after all of the cash journal entries post, the general ledger lists the ending cash balance.

FAQs

What information does a general ledger tell you?

The general ledger can help generate financial statements for stakeholders like investors, creditors, and regulators. Ledger information can also produce management reports for decision-making purposes.

When a business owner notices a sudden rise in expenses, they can investigate the general ledger to determine the cause of the increase. If there are accounting errors, an accountant can dig into the general ledger and fix them with an adjusting entry.

Every business must strive to maintain accurate accounting records to generate reliable financial statements.

What is the difference between a journal and a ledger in accounting?

An accounting journal is filled with individual entries that record the transactions of a business’s accounts. A ledger keeps track of all the accounts of a business, which have been used in their journal entries.

What does a general ledger look like in accounting?

Download this  general ledger template  and you can begin using it for your business.

Where once all journal entries and general ledger accounts were manually recorded by hand, now technology can automate the accounting process. Quality accounting systems have become a staple for small businesses everywhere, as they are essential to the management of accounts and organized record keeping.

How can I get the most out of my general ledger?

To get the most out of your general ledger (and all other reports), set up the company’s structure properly. Hire an accountant or bookkeeper, or learn how to set up the chart of accounts and classifications for your company’s accounting system.

Creating the right structure in your accounting system means that you can track the sales and costs of specific products. You’ll be able to track inventory and suppliers and monitor anything else that can help you make informed decisions.

How can I set up a general ledger in QuickBooks?

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.).

This software ensures the general ledger will sort all transactions through the proper accounts to create accurate financial records. With QuickBooks for Small Businesses you can connect all of your business accounts seamlessly and track all expenses in one place.


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