A general ledger is a book containing all the accounts for recording transactions relating to a company's assets, liabilities, owners' equity, revenue, and expenses. In modern accounting softwares or ERP, the general ledger works as a central repository for accounting data transferred from all sub ledgers 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 statement of financial position and the statement of income and comprehensive income are both derived from the general ledger. Each account in the general ledger consists of one or more pages. The general ledger is where posting to the accounts occurs. Posting is the process of recording amounts as credits (right side), and amounts as debits (left side), in the pages of the general ledger. Additional columns to the right hold a running activity total (similar to a checkbook).
The listing of the account names is called the chart of accounts. The extraction of account balances is called a trial balance. The purpose of the trial balance is, at a preliminary stage of the financial statement preparation process, to ensure the equality of the total debits and credits.
The general ledger should include the date, description and balance or total amount for each account. It is usually divided into at least seven main categories. These categories generally include assets, liabilities, owner's equity, revenue, expenses, gains and losses. The main categories of the general ledger may be further subdivided into sub ledgers to include additional details of such accounts as cash, accounts receivable, accounts payable, etc.
Because each bookkeeping entry debits one account and credits another account in an equal amount, the double-entry bookkeeping system helps ensure that the general ledger is always in balance, thus maintaining the accounting equation:
{Assets} = {Liabilities} + (Shareholders or Owners equity)
The accounting equation is the mathematical structure of the balance sheet. Although a general ledger appears to be fairly simple, in large or complex organizations or organizations with various subsidiaries, the general ledger can grow to be quite large and take several hours or days to audit or balance.
|