How does a general ledger work?
General ledgers store a company’s financial data, with a trial balance verifying debit and credit account entries. The financial transaction record keeps all corporate transactions and provides necessary account information for preparing financial statements. Segregating transaction data by category includes accounts for assets, liabilities, equity, revenues, and costs.
General Ledger Works Functions
Accountants use a general ledger to record and arrange financial statement data. The company’s chart of accounts defines individual sub-ledger accounts for posting transactions.
After closing transactions in the general ledger, the accountant creates a trial balance to indicate the balance of each ledger account.
A General Ledger’s Double-Entry Accounting Function
Businesses using double-entry accounting utilize a general ledger, where each financial transaction impacts two sub-ledger accounts and includes a debit and credit transaction. The sum of all debit and credit entries, termed “journal entries,” must balance in two columns.
Double-entry accounting is based on the accounting equation:
Assets−Liabilities=Stockholders’ Equity
Deducting assets from liabilities yields shareholders’ equity.
The balance sheet displays account-level information in this way. Short-term assets on the balance sheet include cash and accounts receivable.
The double-entry accounting approach uses the accounting equation’s requirement that transactions posted to the accounts on the left of the equal sign equal the sum of transactions posted to the accounts on the right. The balancing rule remains consistently applicable regardless of the equation (e.g., assets = liabilities + shareholders’ equity).
General ledger works: what does it say?
Combining and summarizing transaction facts in the general ledger produces financial reports such as the trial balance, income statement, balance sheet, and statement of cash flows. Accountants, management, analysts, investors, and other stakeholders can regularly evaluate the company’s performance.
Financial statement data may not accurately reflect a company’s financial performance when costs increase or other activities impact sales, net income, or other measures. Specific accounting issues require returning to the general ledger and examining each transaction to find the problem. This may require analyzing dozens of journal entries, but accurate and reliable business financial statements are essential.
An Example of Balance Sheet Transaction
A corporate accountant boosts the cash account with a $200 debit and credits accounts receivable with a $200 credit after a customer pays a $200 invoice. There are equal debit and credit amounts.
In this example, cash increases by $200 while accounts receivable decreases by $200. Thus, increases and decreases influence just one side of the accounting equation. Thus, the equation balances.
Income Statement Transaction Sample
The income statement formula follows: A corporation records client payments for product sales in net sales, along with other sales and refunds. I am subtracting the cost of sales from the total yields of the gross profit for the reporting period.
In addition to selling, general, and administrative expenditures, the income statement includes depreciation, interest, and income taxes. The company’s net income for the reporting period is the difference between inflows and outflows.
A General Ledger Works Purpose?
In accounting, a general ledger records continuous firm transactions. A general ledger organizes transactional data into assets, liabilities, income, costs, and equity. After closing sub-ledgers, the accountant creates the trial balance. The company’s balance sheet, income statement, statement of cash flows, and other financial reports employ trial balance data.
Does Double-Entry Bookkeeping Use a General Ledger?
A double-entry accounting organization stores financial data in a general ledger. Double-entry accounting involves at least one debit and one credit transaction per transaction. Each transaction is shown in two columns, debit and credit, whose totals must balance. This balancing rule uses this equation:
Net assets minus liabilities = equity.
A General Ledger Entry Example
Imagine a corporation receiving $1,000 from a client for its services. The accountant would add $1,000 to assets and deduct $1,000 from receivables—the accounting equation balances when the comparable increase or reduction affects just the asset side.
Conclusion
- Company double-entry accounting starts with the general ledger.
- General ledger accounts provide all transaction data for income statements, balance sheets, and other financial reporting.
- General ledger transactions summarize sub-ledger journal entries.
- The trial balance includes every general ledger account and its balance, making modifications and mistakes simpler to see.
