What is a General Ledger?

The purpose of the general ledger is to sort transaction information into meaningful categories and charts of accounts. The general ledger sorts information from the general journal and converts it into account balances and this process converts the data into the information needed to prepare financial statements. This article explains what a general ledger is and some of its main features.

Difference Between Transactions and Financial Transactions:

As mentioned earlier, the company enters into many activities and transactions throughout the day. Not all activities need to have a financial impact. For example, if a company issues a purchase order for the purchase of certain goods, but no financial transaction has taken place unless the goods are delivered and the invoice is issued by the company issuing the purchase order by the supplier. All transactions with a financial impact need only be logged. Transactions with a financial impact are only recorded in the general ledger.

What is the ledger?

Once we have journaled the transactions in a general or special journal which is also called “the original entry ledger, the transactions should be recorded in the general ledger which is also called “the final entry ledger”. The journal General and General Ledger records transactions, but it is the General Ledger that groups similar transactions into accounts and converts accounting data into meaningful information useful to stakeholders.

Transactions are first recorded in the general journal and then transferred, or posted, to the general ledger, which stores all of a company’s charts of accounts. An account is defined as an accounting record that reflects increases and decreases in a single asset, liability, or equity item (the accounting equation!!). Moreover, the ledger displays the balance of each account, which helps the user to understand the final effects of the transactions.

While journals present a chronological list of a company’s daily transactions, ledgers are organized by account. Therefore, financial statements such as balance sheets and income statements can only be generated from the general ledger and not directly from the journals.

Ledger accounts are simply interest groups. Sub-accounts are created for five types of accounts Assets, Liabilities, Actions, Income or Expenses. Separate records are created to further categorize these accounts to help understand accounting data at a granular level. Depending on individual business needs, the number and variety of sub-accounts (natural accounts) in a given business can vary significantly. In order to more usefully consolidate account information, a business can use sub-ledgers as well as a general ledger.

The purpose of the general ledger is to categorize information into accounts and provide users with different account balances. This categorization ensures that the data is organized and easily accessible for converting it into trial balance and ultimately converting it into financial statements. As the debit and credit rules and the accounting equation still apply, the sum of the balances of all accounts in a ledger is always zero, because for every debit in the journal we have also created a credit corresponding. The standard format helps organize financial information in one place.

A good general ledger software application will provide management with accurate and up-to-date information to make short and long term business decisions. It also has the necessary controls and processes in place to ensure that the correct information is reported. Income statements, balance sheets and cash flow statements are standard reports needed by management to judge the progress of the business and these reports can be created using the trial balance created in General Ledger .