General Ledger Account
Your accountants need to process and record several business transactions in your financial books of accounts according to a system known as double-entry bookkeeping. This means each transaction is recorded in two accounts when written into the books. One account decreases as the other increases. This system helps you track every transaction. Recording the credit and debit like this helps you find the final position of every item for a given accounting period.
Every transaction follows a particular procedure before being written into the final book of accounts. Transactions are first recorded in the original book of entry or the journal. The transactions are then posted to individual accounts in the general ledger account. The general ledger account is then used to calculate the trial balance and complete a trial balance sheet.
So, what is a general ledger account? How do they work? Keep reading to learn more about this critical aspect of accounting.
Definition of General Ledger Account
The general ledger account is the record-keeping system companies use to store financial data. The data includes credits and debits, which are validated with the use of a trial balance. This general ledger offers a written record of all financial transactions across the lifetime of a company.
The information stored in the general ledger helps companies to prepare financial statements. The transaction data is split across different accounts including liabilities, assets, equity, expenses, and revenue.
How Does a General Ledger Work?
The general ledger is at the heart of the accounting system. The ledger is where accountants organize, and store financial data used to create financial statements and make important decisions. The transactions in the ledger are separated into different sub-ledger accounts as per the chart of accounts for the company.
All transactions are then closed out or summarized through the general ledger, which the accountant uses to generate the total balance for the company. The trial balance is a report of the account balance of the individual sub-ledgers. This trial balance is checked for any errors and then adjusted accordingly by making additional entries. This new adjusted trial balance is then used to create the necessary financial statements for the company.
5 General Ledger Account Categories
There are five key categories the general ledger is divided into. These categories are also known as “accounts” and are as follows:
An asset is any resource owned by the company and produces value for the company. An asset can be something such as cash, inventory, equipment, property, patents, and trademarks that a company uses to make money.
Liabilities are the opposite of an asset. They are current and future financial debts a business owes to others and must pay. Current liabilities for a business include things such as taxes and employee salaries. Future liabilities are things such as bank loans, mortgages, lines f credit, and leases that are coming due.
Equity refers to the difference in value between assets and liabilities for a business. If your company has more liabilities than assets, then it has negative equity. Equity includes things such as stock options, common stock, and stocks, depending on whether a company is privately or publicly owned.
Revenue is how much money a business generates through the sales of products and services. However, revenue is more than just sales and includes things such as royalties, interest, and other fees collected from customers and clients.
The expenses listed in the general ledger are the money paid to others for products and services. Expenses include purchases, utilities, meals for staff, travel expenses, and rent for business properties.
General ledgers will typically have a front page at the start. The front page lists the names of all the different accounts included in the ledger. This list is referred to as the “Chart of Accounts.” The documentation related to an individual account within a general ledger is called the “account ledger.”
Examples of General Ledger Accounts
Suppose you owned a publishing company called Lewis and Co. Your company purchases 30KG of paper and spends $20 per Kilo. You made the purchase on December 1st, 2020. In this situation, the entry into the journal and ledger for that transaction would look like the example below:
|Date||Particulars||J.F||Debit Amt (USD)||Credit Amt (USD)|
|(30KG of Paper Purchased From Smiths’ Paper Mill at $20 per Kilo)|
Here’s how this entry would be transferred to the Ledger Accounts:
|Date||Particulars||J.F||Amt (USD)||Date||Particulars||J.F||Amt (USD)|
In other words, accountants record transactions in the particular General Ledger accounts according to the particulars of the transaction. These transactions are all recorded as per the double-entry accounting system. This system means that you enter each transaction into at least two accounts, such as a credit account and debit account. Each transaction also follows the accounting equation:
Assets = Liabilities + Capital
The equation states that a business’s assets are equal to the sum of the capital and liabilities; how much money a company has vs. how much it owes to others. The accounting equation is an integral part of all bookkeeping measures and systems and is something to keep in mind.
General Ledger Control Accounts
A general ledger control account is an account that summarizes sets of subsidiary accounts into a single entry. These control accounts help large businesses minimize the number of postings to the general ledger, making things easier to read. Instead, an enterprise records all of the transaction details in a subsidiary ledger. Doing this means that there’s no need to extract and reconcile information from individual accounts to get all the necessary information. An accountant can consult the control account balance instead to get the information they need.
Businesses use control accounts in one of two different ways:
- A control account can be an integral part of a double-entry bookkeeping system. Businesses use the general ledger to keep creditors and debtors control accounts. They use separate personal accounts from the subsidiary as a reference and for analysis. The Sales and Purchase ledgers work as memorandum books.
- Businesses may use control accounts to extract meaningful information from them. When used like this, subsidiary ledgers are another part of the double-entry bookkeeping system instead of being kept separate.
The general ledger forms the foundation of the double-entry accounting system. A general ledger account includes all of the transaction data an accountant needs to create income statements, financial reports, and balance sheets for a business.
The general ledger records a summary of transactions made in sub-ledgers that go into more detail on individual accounts. They help to save room on financial sheets and summarize information to prevent it from being too complicated. Some businesses employ general ledger control accounts to summarize the data further.
General ledgers are also used to calculate a trial balance. This trial balance lists the balance of a general ledger account, making it easier to check for errors. When the errors are corrected, and updated trial balance is used to create important financial documents.