What Is a General Ledger? General Ledger (also known in accounting as the GL or the Nominal Ledger) is at the heart of any accounting system. A general ledger is the master set of accounts that summarize all transactions occurring within an entity. Ledger is the skillful grouping and presentation of the Journal entries. Learn the accounting fundamentals, general ledger process, and general ledger flow.
What is accounting?
Accounting is a process designed to capture the economic impact of everyday transactions. Each day, many events and activities occur in an entity, these events and activities are in the normal course of business; however, each of these events may or may not have an economic impact. Events or activities that have an effect on the accounting equation are accounting events. The accounting equation is the basis for all accounting systems. Nowadays most of the accounting is automated using sub-ledger and general ledger systems.
The Accounting Process:
The accounting process enables the accounting system to capture accounting data and provide the necessary information to business stakeholders. Given below are the five steps in the accounting process:
- Step1: Identifying Business Stakeholders
- Step2: Understanding Accounting Needs
- Step3: Identifying Accounting Transactions
- Step4: Recording Transactions
- Step5: Preparing Accounting Reports
Generally Accepted Accounting Principles (GAAP):
Generally Accepted Accounting Principles define the accounting procedures, and understanding them is essential to producing accurate and meaningful records. Given below are the fundamental accounting principles:
- GAAP1: The Business Entity Principle
- GAAP2: The Cost Principle
- GAAP3: The Objectivity Principle
- GAAP4: The Unit of Measure Principle
- GAAP5: The Going-Concern Principle
Accounting Systems: Single Entry and Double Entry:
There are two common systems of bookkeeping single entry and double-entry accounting systems. The first – single entry – is simplistic, recording each transaction only once, either as revenue or as an expense. Double-entry bookkeeping has become the standard, and is the preferred way of accounting, as it allows businesses to track both the sources and application of money.
Accounting Methods: Cash V/s Accrual:
Two types of accounting methods are commonly used to record business transactions know as cash accounting and accrual accounting. Under the cash accounting method, revenue is recognized and recorded when the cash is received and expenses are recognized and recorded when the cash payments are made. Under the accrual method of accounting, revenue and expenses are recognized and recorded, when the product or service is actually sold to customers or received from suppliers, generally before they’re paid for.
The Accounting Equation:
The following equation shows the relationship among assets, liabilities, and owner’s equity:
- Assets = Liabilities + Owner’s Equity
- Assets = Liabilities + Owner’s Equity + Revenues – Expenses
What do we mean by Journalizing?
Using the rules of debit and credit, transactions are initially entered in a record called a journal. In this way, the journal serves as a record of when transactions occurred and were recorded. The process of recording a transaction in the journal is called journalizing. The entry in the journal is called a journal entry.
What is General Ledger?
Transactions are first recorded in the general journal and then transferred, or posted, to the ledger, which stores all the charts of accounts of a business. An account is defined as an accounting record that reflects the increases and decreases in a single asset, liability, or owner’s equity item (The Accounting Equation!!). In addition, the ledger shows the balance of each account that helps the user understand the final effects of the transactions.
While journals present a chronological listing of a company’s daily transactions, ledgers are organized by account. As a result, financial statements such as Balance Sheets and Income Statements can only be generated from the general ledger not directly from the journals.
Automated General Ledgers
In order for people inside and outside an organization to use financial data, transaction information is organized by the account in ledgers. A general ledger is the main accounting record of a business. Originally a paper document, a ledger is now more likely to be an electronic document containing summarized financial data and balances for all the accounts of an organization.
In automated systems like ERPs, General Ledger is the central repository for all transactions that get recorded in various supplemental books, which are known as modules or sub-ledgers. Examples of supplemental books in traditional accounting are sales books for sales, purchase books for purchases, cash and bank book for cash related transactions and general journals book to capture adjustment entries. In “Automated Accounting Packages” these supplemental transactions are recorded in modules like Accounts Payables, Accounts Receivables, Purchase, or Inventory.
Accounting Cycle:
Accounting Cycle is the collective and repetitive process of recording and processing the accounting events of a company in different accounting periods. The series of steps begin when a business transaction occurs and end with the period closure where the cycle is again repeated. The steps in the accounting cycle are:
- Step1: Identifying Business Stakeholders
- Step2: Understanding Accounting Needs
- Step3: Identifying Accounting Transactions
- Step4: Recording Transactions
- Step5: Preparing Accounting Reports
General Ledger Process Flow:
GL process flow is a five-step process from recording the transactions in the system to finally running the reports containing financial data out of the system. The input for GL Process Flow is the raw accounting data and the output is the accounting reports that can be used to provide various levels of financial information. The steps in the general ledger process flow are:
- Step1. Create Journal or Import Journal from Sub‐Ledger
- Step2: Review Journals
- Step3: Approve Journals
- Step4: Journals Posting
- Step5: Run Financial Reports
Drilldown from General Ledger to Upstream Systems:
In the advances general ledger systems, users can drill down to sub-ledgers details from General Ledger and can get all of the transaction details that comprise an account balance, regardless of which sub-ledger originated the transaction. This functionality helps in analyzing any account balance by understanding the source of the transaction and viewing additional information that has been captured in the source system and not imported into the general ledger system.
Related Links
You may also like What is a General Ledger? | General Ledger Overview | What is Accounting & Book Keeping | General Ledger Process Flow | Complexities in GL System | Benefits of Automated GLs | Contra & Control Accounts | Equity and Liability Accounts | Introduction to Legal Entities Concept | General Ledger – Advanced Features | Trial Balance in General Ledger | The Accounting Process | The Accounting Cycle | The Accounting Equation | The Subsidiary Ledgers | GL – Enter & Analyze Journals | GL – Review & Approve Journals | GL – Periods and Calendars | GL – Different Accounting Methods | GL – Understanding Chart of Accounts | Multi Currency – Functional & Foriegn | GL – Intercompany Accounting | GL – Journal Entry & Import | GL – Journal Posting and Balances | GL – Reversing Journal Entry | GL – Errors & Reversals | GL – Recurring Journal Entries | GL – Unearned / Deferred Revenue | GL – Using Adjustment Period | GL – Accruals and Reversals | GL – Different Type of Journals | Prepayments and Prepaid Expenses | GL – Inquiry & Drilldown | GL – Accrual Basis Accounting | GAAP to STAT Adjustments | GL – GAAP Accounting
Creation Date Monday, 30 November -0001
Hits 16894
You May Also Like
-
General Ledger Overview
What Is a General Ledger? General Ledger (also known in accounting as the GL or the Nominal Ledger) is at the heart of any accounting system. A general ledger is the master set of accounts that summarize all transactions occurring within an entity. Ledger is the skillful grouping and presentation of the Journal entries. Learn the accounting fundamentals, general ledger process, and general ledger flow.
Read more -
The Accounting Process
In this article we will focus on and understand the accounting process which enables the accounting system to provide the necessary information to business stakeholders. We will deep dive into each of the steps of accounting and will understand how to identify accounting transactions and the process for recording accounting information and transactions.
Read more -
GL – Accrued / Unbilled Revenue
Accrued revenues (also called accrued assets) are revenues already earned but not yet paid by the customer or posted to the general ledger. Understand what we mean by the terms accrued revenue, accrued assets, and unbilled revenue. Explore the business conditions that require recognition of accrued revenue in the books of accounts and some industries where this practice is prevalent.
Read more -
GL – Intercompany Accounting
After reading this article the learner should be able to understand the meaning of intercompany and different types of intercompany transactions that can occur. Understand why intercompany transactions are addressed when preparing consolidated financial statements, differentiate between upstream and downstream intercompany transactions, and understand the concept of intercompany reconciliations.
Read more -
Prepayments and Prepaid Expenses
Prepayments are the payment of a bill, operating expense, or non-operating expense that settle an account before it becomes due. Learn the concept of prepaid expenses. Understand the accounting treatment for prepaid expenses. Understand the concept by looking at some practical examples and finally learn the adjusting entry for these expenses.
Read more -
GL – Using Adjustment Period
In most of the automated financial systems, you can define more than 12 accounting periods in a financial year. This article will explain the concept of the adjustment period and the benefits of having adjustment periods. Adjustment periods have their inherent challenges for the users of financial statements and there is a workaround for those who don’t want to use adjustment periods.
Read more -
Equity and Liability Accounts
Funds contributed by owners in any business are different from all other types of funds. Equity is the residual value of the business enterprise that belongs to the owners or shareholders. The funds contributed by outsiders other than owners that are payable to them in the future. Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities are debts payable within one year.
Read more -
GL – Unearned / Deferred Revenue
Unearned revenue is a liability to the entity until the revenue is earned. Learn the concept of unearned revenue, also known as deferred revenue. Gain an understanding of business scenarios in which organizations need to park their receipts as unearned. Look at some real-life examples and understand the accounting treatment for unearned revenue. Finally, look at how the concept is treated in the ERPs or automated systems.
Read more -
General Ledger Process Flow
In this article, we will explain the general Ledger journal processing flow from entering journals to running the final financial reports. Understand the generic general ledger process flow as it happens in automated ERP systems. The accounting cycle explains the flow of converting raw accounting data to financial information whereas general ledger process flow explains how journals flow in the system.
Read more -
GL – Accrued Expenses
Accrued expenses, sometimes referred to as accrued liabilities, are expenses that have been incurred but have not been recorded in the accounts. Discuss the need to record accrued liabilities and why they require an adjustment entry. Understand the treatment for these entries once the accounting period is closed and learn to differentiate when the commitments become liabilities.
Read more