General Ledger Overview
A General Ledger (GL) is a complete record of all financial transactions of a company, over its lifetime. It is the main source of information used to create a company’s financial statements, including its income statement, balance sheet, and statement of cash flows.
The general ledger is organized by account, so each major category of transactions gets its own record. Each individual account is often referred to as a ledger account. In each ledger account, debit and credit transactions are chronologically recorded, providing a detailed history of all financial transactions involving that account.
Key Components of a General Ledger:
- Chart of Accounts: The general ledger is organized according to the company’s chart of accounts, which is a listing of all accounts that belong to the general ledger.
- Account: Each account within the general ledger is a unique record where information related to a specific type of transaction (like sales, accounts receivable, accounts payable, etc.) is recorded.
- Debits and Credits: Every transaction that a company makes is recorded in the general ledger as a debit to one account and a credit to another.
- Balances: Each account has a balance, which can be calculated and updated as new transactions are recorded.
- Journal Entries: These are the actual entries that are made to the general ledger. Journal entries typically include the date, the amounts and accounts that are to be debited, the amounts and accounts that are to be credited, and a brief description of the transaction.
- Financial Statements: The information contained within the general ledger is used to produce the company’s financial statements. These statements summarize the financial activity of the business over a specific period of time.
The general ledger is an essential part of the accounting process. By maintaining an accurate and up-to-date general ledger, a company can ensure that its financial statements are correct, which is critical for decision-making purposes within the company, and for external parties like investors and creditors.
In today’s technology-driven world, the general ledger is often maintained using accounting software, which automates much of the data entry and calculation processes and reduces the potential for errors.
Example of a General Ledger Overview
Imagine a small business, let’s call it “ABC Gardening Supplies”.
ABC Gardening Supplies has the following ledger accounts in its general ledger:
- Cash: This account keeps track of the company’s cash on hand. For instance, if ABC Gardening Supplies earns $1,000 from selling gardening tools, this would be recorded as a credit (increase) in the Cash account.
- Accounts Receivable: This account keeps track of money that is owed to the company by its customers. If a customer buys $200 worth of seeds but hasn’t paid yet, this would be recorded as a debit (increase) in the Accounts Receivable account.
- Inventory: This account records the value of the goods that the company has in stock. If ABC Gardening Supplies purchases $500 worth of new gardening tools to sell, this would be recorded as a debit (increase) in the Inventory account.
- Accounts Payable: This account keeps track of money that the company owes to its suppliers. If ABC Gardening Supplies owes $300 to a supplier for a delivery of plant pots, this would be recorded as a credit (increase) in the Accounts Payable account.
- Sales: This account keeps track of the revenue that the company earns from selling goods. If ABC Gardening Supplies sells $1,500 worth of goods in a day, this would be recorded as a credit (increase) in the Sales account.
- Cost of Goods Sold (COGS): This account records the cost of producing the goods that the company sells. If it costs ABC Gardening Supplies $1,000 to purchase and prepare goods that it sold, this would be recorded as a debit (increase) in the COGS account.
- Salary Expense: This account keeps track of the wages and salaries the company pays to its employees. If ABC Gardening Supplies pays $2,000 in wages for the month, this would be recorded as a debit (increase) in the Salary Expense account.
Each of these accounts will have many entries over time, recording all the transactions that increase or decrease the balance. By keeping track of these balances, ABC Gardening Supplies can see at a glance how much cash it has on hand, how much it owes, how much it’s owed, what its inventory is worth, and so forth. This information is then used to generate financial statements like the balance sheet and income statement.