What Is a General Ledger?

A general ledger represents the record-keeping system for a company’s fin🉐ancial data, with debit and credit account records validated by a trial balance. It provides a record of each financial transaction that takes place during the life of an operating company and holds account information that is needed to prepare the company’s financial statements. Transaction data is segregated b♑y type into accounts for assets, liabilities, owners’ equity, revenues, and expenses.

How a General Ledger Works

A general ledger is the foundation of a 澳洲幸运5官方开奖结果体彩网: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 澳洲幸运5官方开奖结果体彩网:chart of accounts.

The transactions are then closed out or summarized in the general ledger, and the accountant generates a trial balance. This balance serves as 澳洲幸运5官方开奖结果体彩网:a report o🅘f each ledger account’s bal⛦ance. The trial balance is checked for errors and adjusted by posting additional necessary entries, and then the adjusted trial bala𒐪nce is used to generate the financial statements.

How a General Ledger Functions With Double-Ent𓆉ry Accounting

A general ledger is used by businesses that employ the 澳洲幸运5官方开奖结果体彩网:double-entry bookkeeping method, which means that each financial transaction affects at least two sub-ledger accounts, and each entry has at least one debit and one credit transaction. Double-entry transactions, called journal entries, are posted in two columns, with debit entries on the left and credit entries on the right, and the 澳洲幸运5官方开奖结果体彩网:totalꦺ of all debit 💜and credit entries must balance.

The 澳洲幸运5官方开奖结果体彩网:accounting equation, which underlies double-entry accounting, is๊ as follows:

$\text{Assets} - \text{Liabilities} = \text{Stockholders' Equity}$Assets−Liabilities=Stockholders’ Equity

The 澳洲幸运5官方开奖结果体彩网:balance sheet follows 🦋this format and shows information at a detailed account level. For example, the balance sheet shows several asset accounts, including cash and accounts receivable, in its short-term assets section.

The double-entry accounting method works based on the accounting equation’s requirement that transactions posted to the accounts on the left of the equal sign in the formula must equal the total of transactions posted to the account (or accounts) on the right. Even if the equation is presented differently (such as Assets = Liabilities + Stockholders’ Equity), 澳洲幸运5官方开奖结果体彩网:the balancing rule always applies.

The table below is a simple example of what a double-entry general ledger may look like.

What Does a General Ledger Tell You?

The transaction details contained in the general ledger are compiled and summarized at various levels to produce a trial balance, 澳洲幸运5官方开奖结果体彩网:income statement, balance sheet, 澳洲幸运5官方开奖结果体彩网:statement of cash flows, and other financial reports. This helps acc💖ountants, company management, analysts, investors, and other stakeholde🍎rs assess the company’s performance on an ongoing basis.

Financial statement data often doesn’t tell the whole story When expenses spike in a given period or a company records other transactions that affect key financial metrics (revenues, 澳洲幸运5官方开奖结果体彩网:net income, etc.) That's why it becomes important♑ to go back to the general ledger and dig into the details of each recorded transaction to locate the issue. At times, this can involve reviewing dozens of journal entries, but it is imperative to maintain reliably error-free and credible company financial statements.

A Balance Sheet Transaction Example

If a company receives payment from a client for a $200 invoice, the accountant increases the cash account with a $200 debit and completes the entry with a credit, or reduction, of $200 to accounts receivable (AR). The posted debit and credit amounts are equal.

In this instance, one asset account (cash) is increased by $200, while anotherღ asset account (AR) is reduced by $200. The net result is that both the increase and the decrease only affect one side of the accounti𓆉ng equation. Thus, the equation remains in balance.

An Income Statement Transaction Example

The income statement follows its own formula, which works as follows. When a company receives payment from a client for the sale of a product, the cash received is tabulated in 澳洲幸运5官方开奖结果体彩网:net sales along with the receipts from other sales and returns. The 澳洲幸运5官方开奖结果体彩网:cost of sales is subtracted from that sum to yield the 澳洲幸运5官方开奖结果体彩网:gross profit for that reporting period.

The income statement will also account for other expenses, such as selling, general and administrative 🐻(SGA) expenses, depreciation, interest, and 澳洲幸运5官方开奖结果体彩网:income taxes. The difference between these inflows and outflows is the company's net income for the reporting peꦫriod.

The Bottom Line

A general ledger is an accounting tool that companies use to organize and maintain their financia꧟l records. It is the basis for corporate financial statements and ensures that financial reporting is done accurately and transparently. Companies can use their general ledgers to make better decisions about their finances while giving investors and analysts insight into their financial health and well-being.