General Ledger Accounting Definition, System and Examples

General Ledger Accounting Definition, System and Examples | Accounting Smarts
Charles Hall

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Charles Hall

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June 10, 2022

Are you looking for a system that can track all the records of your company’s assets, liabilities, expenses, equity, revenues, or income? A general ledger is the most effective way to do it.

Are you looking for a system that can track all the records of your company’s assets, liabilities, expenses, equity, revenues, or income? A general ledger is the most effective way to do it.

General ledger accounting is the primary source of financial information and relevant data for a company to form its financial reports. You record transactions from source documents in a general ledger, including invoices, bills, and vouchers, etc. In simple terms, any financial transaction entry must go into a company’s general ledger system.

Since general ledger accounting deals with a business’s total financial activity, you can prepare vital financial reports and statements such as income statements, balance sheets, etc. That is not all; general ledger accounting can also facilitate the identification of trends over time.

General ledger accounting has been around for more than 500 years dating back to the 1400s. Luca Bartolomeo De Pacioli is known as the father of modern accounting and is considered the creator of the general ledger accounting system.

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What is General Ledger Accounting Process

General ledger accounting refers to a method where a central book or books hold records of each and every financial transaction. 

In general ledger accounting, you start a ledger by creating a log or journal that contains every detail about business transactions as and when they occur. The next step is to categorize each financial transaction into their relevant account, such as cash, accounts payable, accounts receivable or sales, etc.

It is best for you to reconcile all your information at regular intervals before entering them into a general ledger. This ensures that your accounts are error-free and contain verified information about them.

The general ledger accounting reconciliation process is all about double-checking important information for each transaction. First, you must gather all the information for each account and examine all journal entries in order to correct any errors in your reports.

While doing so, you balance the general ledger with financial data present, such as your bank statements. In case there are any discrepancies, you must investigate the reasons for errors or unusual transactions.

Why General Ledger Accounting

In general ledger accounting, you compile and summarize financial transaction details at various levels. This allows you to produce income statements, trial balances, statements of cash flows, balance sheets, and various other forms of reports.

These financial reports can help analysts, accountants, management, investors, and other relevant parties make informed decisions in real-time. You can also keep track of any errors and rectify them on the go. However, if an error does occur, general ledger accounting helps you trace the detail of each record and locate the issue.

Therefore, if you are a busy organization, it is highly critical and imperative for you to maintain a reliable, error-free record via the general ledger accounting method.

What are General Ledger Codes

General ledger codes refer to numerical names assigned to each account. For example, you can assign a GL code for your accounts payable as #100, and your internet bills might have#303 as a GL code. You can use a general ledger coding system to group related accounts too.

For instance, you can create a group containing records of all the utility bills and give it a GL code #1. However, do not think of these codes as substitutes for account names. Their core purpose is to make your data entry robust and effective.

You can assign the codes as per your liking. However, some accounting software solutions come with their own built-in codes that you must follow.

Types of General Ledger Accounts

Whatever money your company spends or earns gets an entry in sub-ledger accounts. Think of these as notebooks to record all business transactions as and when they happen. You then collect this information from the sub-ledgers and summarize it in a master or central notebook known as a general ledger.

Some of the common examples of such sub-ledger accounts include.

  • Accounts Payable for money your company owes, i.e., an expense account
  • Accounts Receivable for money owed to your company, i.e., an asset account
  • Cash for liquid cash in hand or liquid assets owned by the company, i.e., an equity account
  • Inventory for all sales and purchase transactions, i.e., an asset account

These sub-ledgers categories may vary depending on the nature of the business. In case you are a startup wondering which sub-ledgers you must maintain in a general ledger accounting system, you might need to hire a professional bookkeeper from your industry.

General Ledger Control Accounts

You can use some general ledger accounts as summary records. These are commonly known as control accounts. In this situation, the details supporting the summary amount in each control account will reflect in subsidiary ledgers.

Take your accounts receivable as an example. Your accounts receivable can be a control account, and an accounts receivable subsidiary account will carry all relevant details for every customer’s credit activity. Other accounts falling in this category are accounts payable, equipment, and inventory.

The Balance Sheet Scenario in General Ledger Accounting

Let us suppose your company receives a payment from a vendor for $1000. In this case, your accountant will increase the cash account by entering a $1000 debit. He will then complete the entry by reducing or crediting $1000 to the accounts receivable account. This way, your credit and debit amounts will be equal.

So what happened here is, that your cash amount increased by $1000. However, you sold a product to get that money, reducing your assets account by $1000 worth. So in order to balance the financial equation, your accountant entered a $1000 entry into your cash account but deducted $1000 from the asset or inventory account.

Let us consider another more complex scenario. Let us suppose your company sends a $100 invoice to a customer. In general ledger accounting, your customer will enter this financial transaction as $100 debit to accounts receivable (your asset account’s balance sheet) and $100 credit to your revenue account (which is your income statement account).

General Ledger Accounting Matters

While each company may have its own reason to use general ledger accounting, two good reasons make it’s a must for all.

Aid in Filing Taxes

You or your company’s accountant must always refer to the business’s general ledger when it comes to filing your taxes.

For example, you are about to file for a Form 1099 for a third-party contractor. In this case, you will need data on how much you have paid this contractor in the last financial year. For this, you will need to check all the relevant invoices present in sub-ledgers and reconcile them with the general ledger.

This is a must in order to ensure that you are filling the Form 1099 as accurately as possible.

Birds-eye View of All Transactions

You make a journal entry every time you record a financial transaction. The general ledger accounting enables you to see each and every journal entry you ever made at a glance. This is the bible of your financial transactions.

So instead of having to find a needle in the stack by going through a plethora of credit statements, bank statements, and invoices, you can simply check the general ledger and identify each transaction.

Versatility

The financial statements generating through general ledger accounting allow you to track the company’s cash flow and financial performance. The core financial statements that you can draw from the data available in the general ledger include the following.

  • Income statement with profits and revenues
  • Balance sheet
  • Cash flow statement

So, if financial statements matter to your business, then general ledger accounting must too.

Implementing General Ledger Accounting in Your Business

Whether you are a startup, a sole proprietor, or a small business, you must already be implementing general ledger accounting in some shape or form. For instance, you are using Microsoft Excel as a bookkeeping tool. In this case, the spreadsheets you use to log your journal entries and each financial transaction is your general ledger.

However, if you are a more tech-savvy organization and looking for advanced options, you can get accounting software. This is helpful because general ledger software is not what you use; it is more about entering data and pulling reports at a click of a button. Yes, it is as simple as that when it comes to general ledger accounting software.

You can free to choose from a wide variety from basic to advanced level software. If you are a business mainly dealing in cash alone, then a single entry system will be sufficient for you. However, if you are a business with complex financial transactions, you must invest in double-entry accounting software.

However, you must remember that using advanced software may require you to hire a professional bookkeeper with general ledger accounting expertise in your industry. An experienced bookkeeper can walk through the accounts, identify any gaps, and fix the errors to make your accounting system a more proficient one.

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Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall