What is General Ledger Accounting?
The general ledger is a set of accounts that records the day-to-day transactions of a business entity by using the double-entry accounting method. The accounting for the general ledger is a summary of all the subsidiary ledger in which all the transaction has been recorded. Each transaction has two parts one is debit and one is credit and a total debit balance of the general ledger will always match with a total credit balance.
General Ledger Accounting Types
1. Assets
All types of assets which are owned and used by the entity for business operations are recorded under assets. It may be current or non-current, tangible or intangible. This ledger includes cash, bank, land & building, debtors, Plant & Machinery, Copyright, Trademark, Furniture & fixture.
2. Liabilities
This ledger pertains to a financial obligation which the entity owes to outside. This also includes current liabilities & non-current liabilities. This sub-ledger includes creditors, long-term borrowings, short-term borrowing.
3. Capital Ledger
This ledger pertains to the money invested in the entity. This includes equity, general reserve, and retained earnings out of the profit. Drawing will also fall under this ledger.
4. Revenue
This ledger pertains to the income earned by the company either from the main business of the entity or from other sources. This includes income from sales, interest, discount received, dividend, investment (Capital Gains).
5. Expenses
This ledger pertains to all expenses incurred by the entity for the business operation it may be direct expenses or indirect expenses. Direct expenses include a purchase account where the cost of raw material has been posted and indirect expenses include day-to-day operational expenses like rent, electricity, maintenance & other utility expenses.
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Benefits of General Ledger Accounting
- It helps in the preparation of trial balance which is an essential requirement for the preparation of the financial statements.
- This will provide the financial position of the business entity at any point in time because in the general ledger all items are recorded separately according to nature.
- This is prepared by using the double-entry method of accounting, therefore, chances of mistakes are very minimum.
- It also facilitates bank reconciliation because all the bank related transactions are posted in one place.
- In General ledger accounting, all the transactions are recorded in separate heads this helps in analysis and comparison with last year and accordingly, measures can be taken for the future.
- This also helps in preparing accounting ratio and ration analysis.
- With the help of a general ledger amount receivable from debtors and the amount payable to creditors can be ascertained at any point in time.
How does it Work?
Step 1: Since General Ledger works on a double-entry accounting system, therefore, first needs to post a journal entries for every transaction.
Step 2: In double-entry accounting below are the rules for posting the entry:
- If assets will increase then assets will be debited similarly if assets will decrease then it will be credited
- If liability will increase then it will be credited and if liability will decrease then it will be debited.
- The capital account always have a credit balance
- Expenses will be debited and income will be credited.
Step 3: For every transaction, two accounts will be affected like for sales one revenue account and another one will be cash/bank account.
Step 4: Similarly, all the transactions will be posted in the above manner over the period.
Step 5: At the end of the year balance of all the ledger will be transferred to the trial balance and all the ledger will be closed.
Step 6: After transferring all the ledger balance into the trial balance, the total debit balance of the trial balance will be equal to the total credit balance
Step 7: If there is a difference between debit balance and credit balance then there must be mistakes that happened during balance transfer from ledger to trial balance or there is an error in a posting journal entry in the general ledger.
Step 8: After preparation of the trial balance, the Balance sheet and profit & loss account will be prepared.
Example
Apple Inc has a business of laptop & computers and as on 01.04.2018 Apple Inc has sold 100 laptops @150 each for $ 15000, Apple Inc has received interest of $50 on 31.03.2019 and Incurred expenses of rent of $ 1500, the electricity of $300.then below journal entry will be passed and posted in general ledger:
Now the above Entry will Reflect in General Ledger in below Manner:
Conclusion
- The general ledger is just like a book where certain rules are defined to record the financial transaction of an entity so that it will give the financial position of the entity at any point in time. Now a day’s size of the business is very big and this is managed by a large no. of people who are performing separate – separate responsibilities, therefore, this type of accounting method is used for recording the transactions of the entity.
- It also helps in the preparation of the trial balance, profit & loss account, and balance sheet. At the same time, this requires skilled manpower for maintaining these transactions, therefore, this is a costly affair also.
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