How can you define ledger in accounting? The meaning of ledger in accounting refers to daily business transaction records maintained by accountants. An account is a record in the general ledger. Ledger accounts examples include debt, depreciation, cash, inventory, salaries, fixed assets, income tax expense, accounts payable, accounts receivable, and stockholder’s equity. The beginning and ending balances are part of a ledger account and the adjustment of these is done in the accounting period. A transaction number is often associated with each transaction in the ledger account.
A General Ledger is the building block of financial records for a business. It is used to keep track of all financial transactions within the business and is extremely useful to generate the business’ Income Statement and Balance Sheet. One glance at the General Ledger should be able to give the reader a quick idea of a company’s financial activity during any given point of time
General Ledger Meaning
A general ledger is used to monitor all the transactions and accounts of a business. It is considered as the foundation of a company’s accounting system. A general ledger contains every transaction of a business and so it is used for record-keeping during the life of a company. It is further categorized into five sub-categories; revenue, assets, liabilities, expenses, and equity. A general ledger contains transactions made in the sub-ledger accounts. The accounts in the general ledger can be used to make a balance sheet, income statement, and financial reports that are of use to the business
How to prepare a ledger account?
It is vital that you understand the general ledger format and the ledger posting rules. The business transactions are recorded in a journal first and then they are posted on the general ledger. The process of posting is where the general journal entries are posted in the ledger accounts. Ledger accounts group transactions that fall under the same account. When the posting takes place, the journal entry is divided into two sections; debit and credit. The debit entry is written on the debit side of the account it belongs to and the credit entry is written on the credit side of the account it belongs to in the general ledger.
Types of general ledgers
As stated earlier, the general ledger can be divided into five categories; assets, liabilities, revenue or income, expenses, and equity or capital.
General ledger asset accounts are those accounts which are related to the items that are used for operating a business. Asset accounts can be divided into current assets and noncurrent assets. Current assets are those which can be converted to cash effortlessly and those which are valid for 1 year or lesser. Non-current assets are those which are valid for more than one year and these can be divided into tangible and intangible assets. Tangible assets include computers and buildings while intangible assets include copyrights and patents.
The revenue or income general ledger accounts are those items through which the business earns or gets its income. The revenue can be generated due to the business activities that take place and business operations. Revenue accounts can be divided into two types; operating and non-operating revenues. Operating revenues are those in which revenue is generated through business activities such as rents and sales. Non-operating revenue is one where revenue is earned without business activities such as interest.
The liabilities in a general ledger mean what the business owes to others. Like assets, liabilities are divided into current and non-current liabilities. Current liabilities are those which need to be paid within one year whereas non-current liabilities are those which need to be paid after one year. An example of a current liability is salary to the employees that must be paid every month. An example of a non-current liability is a long-term loan taken by a business that needs to be paid off in three years. Examples of liabilities include creditors, borrowings, and accounts payable.
General ledger expense accounts are those which the business needs to pay. A company can have direct expenses or indirect expenses. Direct expenses are incurred when the business directly buys materials that are used to manufacture products. Direct expenses are related to the purchase of the products. Indirect expenses of a business are those which are incurred to operate a part of the business or the entire business. Examples of indirect expenses are utilities, business permits, legal fees, and telephone expenses.
Capital or equity ledger account shows shareholder equity. The capital account shows how much is owed to the owners. A debit to the capital account reduces the capital of the business since the business does not owe a lot to the owners. A credit to the capital account means that there is an increase in the business’s capital and the business owes more to the owners. Generally, a business should have credit balance unless the business is operating at a loss. Capital accounts are shown at the bottom of the balance sheet of the business.
General Ledger vs. General Journal
The general journal is often called the book of original entry. When there is a business transaction, it is recorded in the general journal first according to the date when the transaction occurred. The entries from the general journal are posted to the general ledger according to the accounts. That is, the transactions related to one account type are grouped and stored together. You can say that general journal entries are only entered by date. However, general ledger entries are organized and summarized together. The general ledger is used for balancing business transactions too and it is used for sorting and storing financial information of a business
General Ledger vs. Balance Sheet
The balance sheet is used to check how a business is doing financially at any moment of time. It uses the accounting equation to check whether it is balanced or not.
The accounting equation is:
Assets = Liabilities + Equity
The accounting equation is often called the balance sheet equation. The accounting equation helps determine whether a business’s transactions are being properly recorded in its books. The equation uses the ledger accounts in the general ledger to calculate. It is often used when a business is being analyzed by investors, banks, or creditors. General ledgers, on the other hand, are maintained by people who work in the business.
General Ledger vs. Trial Balance
A trial balance is an accounting report that lists the balance of each of the general ledger accounts. The totals of the debit balances and the credit balances should be equal. All the debit balance amounts are listed in the column of Debit Balances while the credit balance amounts are listed in the column of Credit Balances. When the trial balance is not balanced it shows an error has occurred. The trial balance is not the same as a financial statement. The trial balance is of importance to accountants and auditors as it shows the account balances in the general ledger and the information related to proposed adjustments.
Why do I need a general ledger?
A general ledger has many benefits and three of the main benefits are as follows:
- Financial Statements:
A general ledger is used to create financial statements. Financial statements give you an idea about how your business is doing over time. It helps monitor the cash flow of your business since the general ledger data is used for creating financial statements. In a small business, there are three important financial statements called the balance sheet, the income statement, and the cash flow statement. These help a business make informed decisions and help to understand how the business is performing when compared to other businesses.
The general ledger makes finding transactions extremely easy. If you were to find a transaction in old credit card statements or invoices, it will be too time-consuming. Instead, if you take a look at the general ledger, then you will find the transaction much quicker. A general ledger enables you to efficiently store and find an accounting record. This is because your general ledger contains all financial transactions of your business and so all the details are available in one place. If you want to view all the business’s financial transactions in one place then you can view them in the general ledger.
- Tax Filing:
The general ledger is used when it is time to file the taxes. All the revenues and expenses are available in the general ledger. And you need all this information when you want to accurately file your business taxes. A general ledger makes the process easier since you have everything you need in one place. For example, when you are filing for a contractor, you will know how much payment you sent them during the financial year as the information is available in the general ledger. This can help you calculate your taxes correctly and file them the right way too.
To add more convenience to something that makes your financial monitoring easier, Cloud Accounting tools offer business owners and accountants to easily create, organize and view general ledgers in the cloud. This gets rid of unnecessary paperwork, loss of records in the event of a natural disaster and enables easy retrieval and sorting according to your various business needs.