2021-01-18 21:29:25ReportsEnglishTherefore, a General Ledger helps you to know the ultimate result of all the transactions that take place with regards to specific accounts...https://quickbooks.intuit.com/global/resources/row_qrc/uploads/2020/09/Income-Statement-Example.pnghttps://quickbooks.intuit.com/global/resources/reports/general-ledger/General Ledger: Meaning, Classification, and Examples

General Ledger: Meaning, Classification, and Examples

19 min read

You need to record various business transactions in your books of accounts based on the dual aspect of accounting. Thus, as per the Duality Principle, each transaction involves a minimum of two accounts while recording into books. This means one account increases and the other account decreases.

Thus, accounts that get Debited or Credited are used to denote the give and take involved in every transaction. So such a system of debit and credit helps in finding out the final position of every item at the end of the given accounting period.

Now, each of your transactions follows a procedure before they are represented in the final books of accounts. First, the transactions are recorded in the Original Book of Entry, known as Journal. Once the Journal is complete, these transactions are then posted to individual accounts contained in General Ledger.

Then, the balance of each of the General Ledger Accounts is posted in your Trial Balance Sheet. Once you complete the Trial Balance, the account balance is finally entered in the income statement and the balance sheet.

So, in this article, you will learn what is a General Ledger, General Ledger examples, and the General Ledger accounts. You will also learn the reasons as to why you need a General Ledger?

What is General Ledger?

General Ledger refers to a record containing individual accounts showcasing the transactions related to each of such accounts. It is a group or collection of accounts that give you information regarding the detailed transactions with respect to each of such accounts.

For example, say you purchase raw material from your vendor William Paper Mill throughout the year. Accordingly, all the cash or credit purchase transactions entered into with William Paper Mill would be recorded under the account of William Paper Mill.

Therefore, a General Ledger helps you to know the ultimate result of all the transactions that take place with regards to specific accounts on a given date.

For this reason, General Ledger is also known as the Principal Book of Accounting System.

So, you need to refer to your Customer’s Account in your General Ledger if you want to know the amount he is expected to pay you on a particular date. Likewise, you need to refer to the Creditor’s Account in your General Leger if you want to know the amount you are liable to pay to him on a specific date.

Simplified Meaning of General Ledger

General Ledger is a principal book that records all the accounts of your company. It is one of the important books of accounts for your business. Furthermore, all the accounting entries are transferred from the Journal to the Ledger.

This means you first need to record a business transaction in your Journal. Remember, you need to record each of them in Journal in the order in which they occur. Once you record the transaction in the Journal, you are then required to classify and transfer it into a specific General Ledger account.

Thus, General Ledger contains individual accounts in which similar transactions are recorded. These transactions relate to an asset, a liability, an individual, or an expense. Let’s take an example to understand how you can transfer the journal entries to General Ledger.

Example

Say you own a publishing house Martin & Co. and purchased 20 kg paper on cash at $20 per kg on December 1, 2020. Therefore, the following is the journal and ledger that you need to record into books for such a transaction.

DateParticularsL.F.Debit Amt (USD)Credit Amt (USD)
1/1/2020Purchases400
To Cash400
(20kg Paper Purchased from William Paper Mill at $20 per kg)

Now this journal entry would be transferred to respective Ledger Accounts in the following way.

Cash Account
Dr.Cr.
DateParticularsJ.F.Amt (USD)DateParticularsJ.F.Amt (USD)
1/1/2020Purchases400

In other words, you record transactions under the individual General Ledger accounts to which such transactions relate. Further, these transactions are recorded based on the Duality Principle of Accounting.

As per this principle, there are at least two accounts involved when a particular transaction takes place. Further, the Duality Principle is expressed in terms of the below accounting equation.

Assets = Liabilities + Capital

This equation states that the assets of your business are always equal to the sum of the owner’s capital and the claims of the outsiders.

Thus, each transaction of your business takes place in such a way that this equality between the two sides of the accounting equation is always maintained. That is, at any point in time, the resources or the assets of your business must equate to the claims of owners and outsiders.

This is because owners and the outsiders are the ones who go in for providing such resources.

Classification of General Ledgers

Typically, there are three different types of Ledgers that you can prepare. These include:

  • Debtors Ledger or Sales Ledgers

Sales Ledger or Debtors Ledger is one of the three types of Ledgers that you prepare as a firm or a business entity. It records all the transactions that take place between you and your debtors. Here, debtors are nothing but the business entities to whom you have sold goods that you manufacture.

Thus, it contains a collection of accounts associated with your customers. Further, it showcases the amount your customers owe to you or the amount that is yet to be received from them.

In addition to this, it also records the sales return. Here, Sales Return refers to the goods that your customers return.

Thus, your Sales Ledger tracks detailed information about goods sold to your customers. So following are the details recorded in your sales ledger.

  • Date of Sale
  • Type of goods sold
  • Amount of goods
  • Name of the customers
  • Tax Details, etc.

Furthermore, you can refer back to the details with regards to the sales made in case you need to do so in the future. Likewise, Sales Ledger also helps you to keep track of payments received and yet to be received from your customers.

  • Creditors Ledger or Purchases Ledger

Purchases Ledger is a Ledger that records all transactions related to purchases that your business entity makes. In other words, Purchase Ledger records all the transactions taking place between you and your suppliers.

Therefore, a Purchase Ledger or a Creditors Ledger showcases the amount you pay to your suppliers or the amount yet to be paid for the purchases made.

Thus, a purchase ledger helps you to keep a track of the purchases your business entity makes. This way you can make sure that you have enough purchases for the smooth manufacturing of the products.

Further, the purchase ledger helps you to know the amount you pay to the creditors as well as the outstanding amount. Besides this, you can refer back to the purchase details in case you need to so in the future.

Finally, the purchase ledger also helps you to know the following.

  • Type and quantity of goods you purchased
  • List of suppliers, and
  • Purchases involving huge sums of money
  • General Ledger

A General Ledger is a Ledger that contains all the ledger accounts other than sales and purchases accounts. Therefore, you need to prepare various sub-ledgers providing the requisite details to prepare a single ledger termed as General Ledger.

So, General Ledger contains information related to different accounts. These accounts provide information that helps you in preparing your business’ financial statements. These financial statements include the income statement and balance sheet.

Furthermore, the information recorded in General Ledger is divided based on the type of accounts. These General Ledger Accounts include the following.

  • Assets
  • Liabilities
  • Owner’s Equity
  • Revenues and Gains
  • Expenses or Losses

Benefits of General Ledger

A General Ledger is one of the important records in the system of accounting. It is prepared after you pass journal entries in the Books of Original Entry (Journal).

As mentioned earlier, you record various transactions in Ledger under separate account heads. These include Sales Account, Purchases Account, Inventories Account, etc.

Thus, such a record helps you in tracking various transactions related to specific account heads. Further, it also helps in speeding up the process of preparing books of accounts.

Hence, thus General Ledger Accounting helps you as a business in a number of ways.

  • Preparation of Financial Statements

You cannot prepare financial statements like Trading and P&L and balance sheets without General Ledger. This is because the detailed accounts in General Ledger help you in preparing the trial balance.

Further, the Trial Balance ensures that the information contained in your Ledger Accounts is accurate. Therefore, you can further use the accurate amounts showcased in your Trial Balance to prepare the financial statements. These statements include the income statement and the balance sheet.

So, preparing such financial statements becomes challenging if you do not prepare General Ledger. Thus, you as a business owner cannot evaluate your company’s liquidity, profitability, and overall financial position.

  • Final Position of Specific Accounts

You record the financial transactions under separate account heads in your company’s General Ledger.

Furthermore, at the end of the accounting period, you close these Ledger Accounts. You do this as a result of balancing the debit and the credit sides of such accounts.

Thus, you get an understanding of your company’s position with regards to debtors, creditors, expenses, revenues, incomes, etc. For example, the outstanding payments against suppliers, payments to be collected from customers, etc.

  • Easy Audit

You may choose to conduct an internal audit or get your accounts audited by an accounting professional. Therefore, General Ledger acts as an important financial record that is audited whatever may be the case.

This is because General Ledger Accounts records transactions under various account heads. Further, it provides detailed information with regards to such accounts.

Thus, it may help you to undertake the audit smoothly. This is because you can easily verify if various accounting items are classified and recorded accurately with the help of the given information.

Furthermore, General Ledger Accounting also helps you to spot material misstatements with regard to various accounts. Also, the accounting professional auditing your company accounts may ask for sales receipts, purchase invoices, etc. They may do so in order to check if proper amounts are charged.

Thus, all of this becomes easy when you prepare proper ledger accounts.

  • Easy Tax Filing

General Ledger Accounts help you to record details of transactions that your business undertakes over an accounting period.

For example, your sales ledger contains information like tax information, invoice number, goods sold, date of sale, customer details, etc.

Likewise, the revenue and expense accounts give an accurate view of the incomes earned or the expenses incurred. Thus, these details come in handy as you do not have to look for invoices or bank statements at the time of filing tax returns.

This is because the details recorded in your ledger accounts provide sufficient details to file your tax returns.

  • Identification of Unusual Transactions

A number of transactions happen during an accounting period. Thus, it becomes difficult for you to find unwanted transactions if you do not categorize the transactions in General Ledger.

Further, this could become a cause of concern for you as a business entity. Say, for instance, you were overcharged for an item you purchased. Now, it becomes challenging for you to identify this transaction if the Ledger Accounts are not prepared. This is because there are a number of transactions that occur during an accounting period.

  • Assessment of Company’s Financial Health

General Ledger Accounts are the basis on which you prepare Trial Balance. From Trial Balance, you are able to prepare statements of final accounts. These include the income statement and balance sheet. Such financial statements help you in knowing the profitability and overall financial position of your business.

In other words, you get a clear view of your business’s capacity to generate profits and the resources you have to meet outsider’s claims.

Control Accounts

A Control Account is nothing but a General Ledger Account where you record only the summarized information regarding a specific account. It does not contain detailed information related to such an account. Thus, you need to refer to a related subsidiary ledger to know the details of such a control account.

Here, a Subsidiary Ledger is a ledger recording detailed information of the related Control Account. Accounts Receivable is most commonly used as a General Ledger Control Account.

Thus, you simply record a summary of various balances in accounts receivable when you use it as a Control Account. These include a summary of:

  • Credit Sales
  • Sales Returns
  • Cash Collected from Customers
  • Discounts Given During an Accounting Period

Accordingly, you do not record details of each sales transaction undertaken with various customers in the Accounts Receivable Control Account.

But, you can refer to the related subsidiary account if you need to check any detail regarding the sales made to a specific customer.

Say, the following are the credit sales undertaken during an accounting period.

ParticularsAmount (USD)
Credit Sales200,000
  • Goods Sold to Jack & Co.
100,000
  • Goods Sold to Mayers
40,000
  • Goods Sold to John
60,000

Thus, as per the above table, the credit sales figure of $200,000 would go into the accounts receivable control account. Whereas, the sales details of various debtors like Jack & Co., Mayers, and John can be found in the related subsidiary ledger.

Types of General Ledger Accounts

General Ledger Accounts can be put into five categories. These are as follows.

  • Asset Accounts

Assets are nothing but the resources your business entity owns. These resources have the capacity to generate cash flows. Thus, assets are items of economic value that can be converted into cash or cash equivalents.

Furthermore, the assets are categorized into current assets and fixed assets. These are typically reported on the left-hand side of your company’s balance sheet.
Thus, the asset account includes the following list of items.

    • Cash
    • Debtors
    • Accounts Receivable
    • Inventory
    • Land and Building
    • Plant and Machinery
  • Liabilities Account

Liabilities are the amounts you owe to individuals or outsiders. These are the financial obligations that you are bound to fulfill. Further, these are the obligations that you have to fulfill for the amounts you have borrowed and which have not yet been paid for.

Also, liabilities can be represented on the right-hand side of the balance sheet. So, liabilities can be further divided into current liabilities and non-current liabilities. The following are examples of liabilities.

    • Creditors
    • Outstanding Expenses
    • Accounts Payable
    • Long-Term Loans
  • Stockholders Equity

The stockholder’s equity refers to the excess of assets over liabilities of your business. In other words, these are the assets remaining after you pay off all the debts and the liabilities.

So, stockholder’s equity is nothing but the capital that your shareholders invest in your business in return for the company’s stock and retained earnings.

Further, the shareholder’s equity includes share capital, retained earnings, and treasury stock. Thus, the shareholder’s equity appears on the liability side of your company’s balance sheet after current and non-current liabilities.

    • Operating Income Accounts

Operating Income is the income that you generate from your core business operations. Thus, operating income helps you to know your capacity to generate profits from your primary business activity.

So, the operating income includes sales revenue, income received as fees and commission, etc. These incomes depend on the type of business you undertake.

    • Operating Expense Accounts

Operating Expenses are the expenses that you must mandatorily incur to run the day-to-day operations of your business. Thus, these are the expenses without which you would not be able to carry out your core business operations. Examples of Operating Expenses include rent, payroll, insurance, etc.

    • Non-Operating or Other Income Accounts

Unlike Operating Expenses, the Non-Operating Incomes and Expenses are one-time incomes or expenses that you earn or incur. Neither are gains an outcome of your core business activity. Nor are such expenses related to your core business operations.

Examples of non-operating incomes and expenses include:

      • Gain on Sale of Assets
      • Loss on Sale of Assets
      • Interest Expense
      • Dividend Income
      • Interest Income

Examples of General Ledger Accounts

All General Ledger accounts can be classified into five categories. Examples of Ledger Accounts under these five categories. Some of these accounts are balance sheet accounts and some are income statement accounts.

In your General Ledger, the Balance Sheet Accounts appear first and the Income Statement Accounts follow.

  • Balance Sheet Accounts

    • Asset Accounts

      • Cash
      • Bank
      • Inventory
      • Accounts Receivable
      • Investments
      • Machinery
      • Land
      • Equipment
      • Furniture
    • Liability Accounts

      • Accounts Payable
      • Notes Payable
      • Creditors
      • Borrowings
      • Accrued Expenses Payable
      • Customer Deposits
    • Stockholders Equity Accounts

      • Common Stock
      • Retained Earnings
      • Treasury Stock
    • Income Statement Accounts

      • Operating Income Accounts
        • Sales
        • Fees
      • Operating Expense Accounts
        • Rent
        • Salaries
        • Advertising Cost
        • Depreciation
        • Legal Fees
        • Insurance
        • Office Supplies
      • Non-Operating or Other Income Accounts
        • Gain on Sale of Assets
        • Loss on Sale of Assets
        • Interest Expense
        • Interest Income
        • Dividend Income

Reasons Why You Need a General Ledger?

General Ledger is the second most important Book of Entry after the Journal. This is because you record transactions under specific account heads in Ledger.

Furthermore, unlike journal where transactions are recorded in chronological order as they occur. Thus, you record transactions in the ledger by classifying them under various account heads to which they relate.

In addition to this, your ledger contains detailed information with regards to every transaction. For instance, your Purchase Ledger contains the following supplier details.

  • Supplier Details
  • Type of Goods purchased
  • Amount of goods bought, etc.

Therefore, Ledger makes it easy for you to refer back to transactions in case you need to do so in the future. Besides this, you can also understand the following.

  • how much do you owe to your suppliers,
  • payments yet to be received from your customers,
  • the revenue you earn, and
  • the expenses you incur in a given accounting period.

Likewise, having proper Ledger Accounts help you to prepare the Trial Balance Sheet. Thus, with the Trial Balance, you can verify the accuracy of your accounts and prepare final accounts. These accounts may include the Income Statement and Balance Sheet.

Furthermore, a General Ledger helps you to know the overall profitability and financial health of your business entity. In addition to this, the detailed information contained in General Ledgers helps you to do the audit smoothly.

Thus, you can easily find information like a sales transaction, purchase transaction, etc. in a General Ledger.

Needless to say, General Ledger is one of the primary books of entry. Thus, it forms the basis of your financial statements and helps you in evaluating the financial affairs of your firm.

What is a GL Reconciliation Process?

Your General Ledger records transactions under different account heads. Thus, General Ledger Reconciliation helps you to ensure accuracy of the information contained in your General Ledger Accounts.

This is done by comparing balances appearing on the Ledger Accounts to the original documents like bank statements, invoices, credit card statements, purchase receipts, etc.

Furthermore, you identify errors or misstatements and take the requisite actions to make good the errors. Therefore, your or your accountants go through each of the accounts individually if you prepare Journal and Ledger manually.

Further, you also match General Ledger Account balances to the source documents to see if the accounts are accurate. However, with online accounting software like QuickBooks, the General Ledger Reconciliation had become a lot easier.

This is because you or accounting professionals are no longer required to go through the pain of recording the transactions first in the Journal and then transfer them to Ledger.

So, the following are the steps that you need to follow to undertake General Ledger Reconciliation.

  • Check Opening and Ending Balances

In this step, you need to compare the previous accounting periods closing trial balances to the opening balances of the current period ledger accounts. Thus, you need to check the balances for balance sheet accounts like assets, liabilities, and stockholder’s equity.

Whereas, the income statement accounts like operating, non-operating income and expenses start afresh in every accounting period. That is, these accounts must have a NIL balance at the beginning of the accounting period.

Hence, such an investigation helps you to avoid looking for errors later. Furthermore, such a comparison becomes a lot easier with an online accounting software like QuickBooks.

  • Review Individual General Ledger Accounts

Under this step, you need to check the amounts recorded in each transaction forming part of your General Ledger. So,you will have to keep your source documents handy if you are preparing your General Ledger Accounts manually.

These sources help you to verify that the amounts recorded in the Ledger accounts are accurate. However, reconciling individual account balances becomes extremely easy with online accounting software like QuickBooks.

This is because the software comes with a Bank Reconciliation feature. This feature automatically matches the transactions recorded in your books of accounts with the bank statement balances.

  • Recording Correct Entries

Suppose you discover after reconciliation that certain amounts were not correctly recorded in your Ledger. It could be an entry with an incorrect amount or an entry you completely omitted to record in your General Ledger Accounts.

For example, you identified that a payment of $1,000 to your vendor William Paper Mill was wrongly recorded as $100. Now, the best practice of recording a correct entry is to reverse the original entry and then record a new entry with the correct amount.

Original Entry
ParticularsDebitCredit
William Paper Mill$100
To Cash$100
Reverse Entry
ParticularsDebitCredit
Cash$100
To William Paper Mill$100
Correct Entry
ParticularsDebitCredit
Cash$100
To William Paper Mill$100
  • Recording Adjusting Entries

Adjusting Entries are the entries prepared at the end of the accounting period to consider income or expenses that you have not yet recorded in the General Ledger. This is done to ensure that your financial statements are accurate.

Thus, various adjusting entries include entries for accrued expenses, accrued revenues, prepaid expenses, deferred revenues, and depreciation.

For example, you need to record the rent expense every month if you take computers on rent and decide to prepay the rent in January for the next twelve months. This is so because you do not want to understate expenses in your financial statements for the next 12 months.

Say, you record a Prepaid Rent of $500 at the end of every month. Thus, the adjusting entry would be as follows.

Adjusting Entry
ParticularsDebitCredit
Rent$500
To Prepaid Rent$500
  • Preparing Financial Reports

You can prepare financial statements once you have verified the accuracy of your ledger accounts.

What is the GL Code?

General Ledger Codes are nothing but the numeric codes that you assign to different General Ledger Accounts. These accounts help you in organizing the General Ledger Accounts properly and recording transactions quickly.

Thus, it can be very difficult to organize if you have a huge number of transactions in a given accounting period. This is where GL Codes come handy.

So, you can easily find transactions you are searching for in your General Ledger if you have a code for every transaction.

Further, you need to decide how to assign such codes. For instance, you could assign four-digit codes for all your accounts. Also, you could assign specific numbers to specific accounts. Like, you could assign the first two digits as 21 for accounts associated with revenue.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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