A general ledger keeps a record of all the financial transactions within a business. The transactions recorded are then used for bookkeeping and accounting purposes. The general ledger includes all the data needed to produce the company’s income statement, balance sheet, and other financial reports.
Generally, the general ledger will be kept current by the business owner, a professional accountant, or a bookkeeper. All the data in the general ledger must be current and accurate daily as it is crucial to business operations.
Before the digital age, the general ledger was a book where daily accounting information was recorded and balanced by hand. Today, the business accounting person will use accounting and bookkeeping software to record the data and produce financial reports.
Handling the finances of a company can be challenging. While hiring an accounting or bookkeeping professional is suggested, every business owner should understand the general ledger and its function. Here is everything you need to know about a general ledger.
How Does a General Ledger Work?
The general ledger is created to organize data and keep records of each financial transaction of the business. Transactions are posted to individual sub-ledger accounts, as defined by the company’s chart of accounts. Each account is closed at the end and is summarized on the general ledger.
The final balance is then used in the trial balance by the accountant. The general ledger is created by the double-entry method. In the double-entry method, an entry to one account requires an opposite entry to another to balance debit and credit balances.
General ledger accounts are also known as “T accounts” due to the way they are formed. The transactions are first recorded in the journal, known as journal entries, then transferred to ledgers. The most common ledger accounts are sales journals, purchase journals, cash receipt journals, and cash payment journals.
There are many other accounts, but these are the four main journals. The purpose of double-entry accounting is to make sure the primary accounting equation balances. The primary accounting equation is Assets = Owner’s Equity + Liabilities.
Why is a General Ledger Important?
The general ledger is vital to the financial operations of the business. The data provided in the general ledger ensures that your trial balance calculations are accurate. It also makes filing tax returns easy because you have expenses and income in one place. Additionally, the data provided helps you spot unusual transactions immediately and prevent fraud.
Can Accounting Software be Used to Create a General Ledger?
There is accounting software made specifically to create a general ledger. General ledger software provides a complete record of the financial management of a business, including transactional records.
Using accounting software is beneficial as it is quick and easy. The general ledger software automatically posts entries from respective account ledgers and calculates the current balances according to the specified date. The best accounting tools to create a general ledger are QuickBooks Desktop Enterprise Software, Dynamics 365 Software, Xero, Wave Accounting, Happay, and Brokermint.
Understanding and creating a general ledger in your business accounts is imperative as a general ledger is the foundation of the other accounting activities. A general ledger follows the basic accounting equation, which is:
Assets = Owner’s Equity + Liabilities
The importance of a general ledger is that it provides an accurate record of all financial transactions, and it helps you compile a trial balance so your books balance. It is a way of preventing errors and locating frauds to keep the finances in the business safe and secure.
The data used in the general ledger is used in the business’s income statement, the balance sheet of the business, and other financial records. After completing the general ledger, a trial balance is created to ensure all the transactions recorded are correct. If the trial balance is not balanced, another “T account” is created for bad debts.
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