Definition

A general ledger contains all the accounts for recording transactions relating to a company's assets, liabilities, owners' equity, revenue, and expenses. In modern accounting software or ERP, the general ledger works as a central repository for accounting data transferred from all subledgers or modules like accounts payable, accounts receivable, cash management, fixed assets, purchasing and projects. The general ledger is the backbone of any accounting system which holds financial and non-financial data for an organization. The collection of all accounts is known as the general ledger. Each account is known as a ledger account. In a manual or non-computerized system this may be a large book.

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What is a 'General Ledger'

A general ledger is a company's set of numbered accounts for its accounting records. The ledger provides a complete record of financial transactions over the life of the company. The ledger holds account information that is needed to prepare financial statements and includes accounts for assets, liabilities, owners' equity, revenues and expenses.

Explaining 'General Ledger'

Using a general ledger is part of a system used by accountants to create the firm’s financial statements. Transactions are posted to the general ledger accounts, and the accountant generates a trial balance, a report listing all the accounts and each account’s balance. The trial balance is adjusted by posting additional entries, and the adjusted trial balance is used to generate the financial statements.

How a Double Entry System Works

A general ledger is used by businesses that employ the double-entry bookkeeping method, which means that each financial transaction affects at least two general ledger accounts and each entry has a debit and a credit transaction. Double-entry transactions are posted in two columns, with debit postings on the left and credit entries on the right, and the total of all debit and credit entries must balance. If a client pays a $200 invoice, for example, the cash account is increased with a $200 debit and the accountant credits $200 to accounts receivable. The amount posted as debits and credits are equal.

Factoring in the Balance Sheet

The balance sheet is one of four major financial statements. Cash and accounts receivable are balance sheet accounts, and the balance sheet formula is stated as (assets – liabilities = equity). The double-entry system also states that that amounts posted to the left of the equal sign in the formula must equal the total on the right. In this example, one asset account (cash) is increased by $200, while another asset account (accounts receivable) is reduced by $200. The net result is that both the increase and the decrease affect the left-hand side of the equation, and the equation remains in balance.

Examples of Income Statement Transactions

Another important financial report is the income statement. The income statement formula is (revenue – expenses = net income, or profit). This formula must also stay in balance so that the financial statements are accurate. It is possible for a transaction to impact both the balance sheet and the income statement. For example, assume that a company bills a client for $500 and posts a $500 debit (increase) to accounts receivable and a $500 credit (increase) to revenue. Debits and credits both increase by $500, and the totals stay in balance.

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Further Reading

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