What is a General Ledger (GL)? - TechTarget

A general ledger (GL) is a set of numbered accounts a business uses to keep track of its financial transactions and to prepare financial reports. Home ERPadministrationandmanagement Businesssoftware generalledger(GL) Sharethisitemwithyournetwork: By BenLutkevich, TechnicalWriter WesleyChai, TechnicalWriter DavidEssex, IndustryEditor Whatisageneralledger(GL)? Ageneralledger(GL)isasetofnumberedaccountsabusinessusestokeeptrackofitsfinancialtransactionsandtopreparefinancialreports.Eachaccountisauniquerecordsummarizingaspecifictypeofasset,liability,equity,revenueorexpense.Achartofaccountslistsalloftheaccountsinthegeneralledger.AlargebusinesscanhavethousandsofaccountsinitsGL. Certifiedpublicaccountants(CPAs)andbookkeeperstypicallyaretheonesaccessingandusinggeneralledgers.Followingtheaccountingequation,anydebitaddedtoaGLaccountwillhaveacorrespondingandequalcreditentryinanotheraccount,andviceversa. Companiesusegeneralledgerstoforthefollowingreasons: monitorfinances; tracktransactionsandcashflow; compileandmaintaininformationforbusiness-relatedreports;and helppreventaccountingerrorsandfraud. Whydocompaniesusegeneralledgeraccounts? Ageneralledgerprovidesvaluetobusinessesinseveralways,includingthefollowingthree: Financialstatements.GLsgenerateanumberofimportantfinancialstatementsforvariousinternalstakeholders.Theycanusethefinancialinformationprovidedinthosestatementswhenmakingbusinessdecisions. Accountingrecords.AGLalsoprovidesfinancialaccountingrecordsforallofanorganization'sbusinesstransactionsandaccountbalances.Theserecordsandthefinancialdatatheycontaincanhelpaccountantsspotunusual,erroneousorfraudulenttransactions. Trialbalance.AGLenablesabusinesstocompileatrialbalancewherealldebitsandcreditsaretotaled.Mostorganizationsdothisperiodically,oftenattheendofareportingperiod,sotheycanproactivelystayontopofexpenses. Howdoesageneralledgerwork? Thegeneralledgerfunctionsasacollectivesummaryoftransactionspostedtosubsidiaryledgeraccounts,suchascash,accountspayable,accountsreceivableandinventory. Generalledgersworkusingadouble-entryaccountingmethod.Thisapproachshowsexpensesandincomeitemsindollaramountsasdebitsandcredits.Eachgeneralledgeritemorentrycanbedividedintofourmainparts: ajournalentrydescribingtheitemnumberofthetransactionpostedtotheaccount; adescriptionforthespecifictransaction; adebitorcreditvalueforthenetbalancechange;and aresultingbalanceafterthecreditordebitisposted. Duringthebookkeepingprocess,otherrecordsoutsidethegeneralledger,calledjournalsordaybooks,areusedforthedailyrecordingoftransactions.Thegeneraljournalconsistsoftheaccountingentriesforeachbusinesstransactionthatoccurredinorderbydate. Thesetransactionscanincludecashpaymentsagainstaninvoiceandtheirtotals,whicharepostedincorrespondingaccountsinthegeneralledger.Inaccountingsoftware,thetransactionswillinsteadtypicallyberecordedinsubledgersormodules. Thetotalscalculatedinthegeneralledgerarethenenteredintootherkeyfinancialreports,notablythebalancesheet--sometimescalledthestatementoffinancialposition.Thebalancesheetrecordsassetsandliabilities,aswellastheincomestatement,whichshowsrevenuesandexpenses. Incomestatementsareconsideredtemporaryaccountsandareclosedattheendoftheaccountingyear.Theirnetbalances,positiveornegative,areaddedtotheequityportionofthebalancesheet. Forexample,theequityportionmightincludetheshareholders'orowners'equityinaprivatecompany,retainedearningsinanonprofitorganizationandfiguresthatarederivedbysubtractingliabilitiesfromtangibleandintangibleassets.Incontrast,theaccountsthatfeedintothebalancesheetarepermanentaccountsusedtotracktheongoingfinancialhealthofthebusiness. Generalledgeraccountsarenotbudgetaccounts.Instead,theyshowactualamountsspentorreceivedandnotmerelyprojectedinabudget. Acompanymayopttostoreitsgeneralledgerusingblockchaintechnology,whichcanpreventfraudulentaccountingtransactionsandpreservetheledger'sdataintegrity. AscreeninthegeneralledgermoduleofSAP'sS/4HANAERPsuiteletsyouviewadirectoryofthejournalentriesthatfeeddataintoaGLaccount. Typesofgeneralledgeraccounts Broadly,thegeneralledgercontainsaccountsthatcorrespondtotheincomestatementandbalancesheetforwhichtheyaredestined. Theincomestatementmightincludetotalsfromgeneralledgeraccountsforcash,inventoryandaccountsreceivable,whichismoneyowedtothebusiness.Theyaresometimesbrokendownintodepartmentssuchassalesandservice,andrelatedexpenses.TheexpensesideoftheincomestatementmightbebasedonGLaccountsforinterestexpensesandadvertisingexpenses. OtherGLaccountssummarizetransactionsforassetcategories,suchasphysicalplantsandequipment,andliabilities,suchasaccountspayable,notesorloans. OthertypesofGLaccounts Whiletheaboveaccountsappearineverygeneralledger,otheraccountsmaybeusedtotrackspecialcategories,performusefulcalculationsandsummarizegroupsofaccounts.Thelattertypeiscalledacontrolaccount. Forexample,aCPAmightuseaT-account--namedbecauseofitsphysicallayoutintheshapeofaT--totrackjustthedebitsandcreditsinaparticulargeneralledgeraccount. Generalledgersanddouble-entrybookkeeping Followingtherulesofdouble-entrybookkeeping,eachentryinthegeneralledgermustappearintwoplaces:onceasadebitandonceasacorrespondingcredit.Andthetwoaddedtogethermustequalzero. Inaccounting,thetermsdebitandcreditdifferfromtheircommonplacemeanings.Whethereachaddstoorsubtractsfromanaccount'stotaldependsonthetypeofaccount.Forexample,debitinganincomeaccountcausesittoincrease,whilethesameactiononanexpenseaccountresultsinadecrease.Goods-receipt/invoice-receiptaccountscanhaveeitheracreditordebitbalance. Generalledgerreconciliation Attheendofeachfiscalperiod,atrialbalanceiscalculatedbylistingallofthedebitandcreditaccountsandtheirtotals.Thosewithdebitbalancesareseparatedfromtheoneswithcreditbalances.Thedebitandcreditaccountsarethentotaledtoverifythatthetwoareequal.Iftheyaren't,theaccountantlooksforerrorsintheaccountsandjournals. However,thetrialbalancedoesnotserveasproofthattheotherrecordsarefreeoferrors.Forexample,ifjournalentriesforadebitanditscorrespondingcreditwereneverrecorded,thetotalsinthetrialbalancewouldstillmatchandnotsuggestanerror. Companiesuseageneralledgerreconciliationprocesstofindandcorrectsucherrorsintheaccountingrecords.Insomeareasofaccountingandfinance,blockchaintechnologyisusedinthereconciliationprocesstomakeitfasterandcheaper. Generalledgeraccountingsoftware Forcenturies,generalledgerswerekeptonpaper.However,inrecentdecadestheyhavebeenautomatedusingenterpriseaccountingsoftwareandinenterpriseresourceplanningapplications.Thesetoolsintegratecoreaccountingfunctionswithmodulesformanagingrelatedbusinessprocesses. Someofthebusinessprocessesmanagedcouldincludethefollowing: ordermanagement humanresourcemanagement enterpriseassetmanagement riskmanagementandcompliance supplychainmanagement customerrelationshipmanagement businessintelligence financialreporting Insuchsystems,theGLservesasacentralrepositoryfortheaccountingdata.Featuresthatgeneralledgersoftwareshouldhaveincludethefollowing: bankreconciliation taxpreparation customizations reportinganddashboards mobileapplications Generalledgertransactionexample Hereisanexampleofanaccountingsystemtransactionwithinageneralledgerforafictionalaccount,ABCDEFGHSoftware.NotethatthisexamplereferstoABCDEFGHSoftware'scashaccount. AgeneralledgertransactionforfictionalcompanyABCDEFGHSoftware. Theleftmostcolumnintheexampleaboveisthedateofthetransaction.Toitsrightisthejournalentrynumberassociatedwiththetransaction,whichcontainsanidentifyingnumberassociatedwiththetransaction. Thedescriptionofthetransactionisinthenextcolumn.Itstatesthereasonbehindthetransaction.Inthisexample,thetransactionisforacashpaymentfromaclientaccounttoABCDEFGHSoftware.Sincethecashaccountisreceivingincome,thenthedebitcolumnwillshowanincreaseanddisplayasumfortheamount.Inthiscase,itis$10,000. Forthistransaction,thecreditcolumnwillremainunchangedforthisaccount.However,aseparateledgerforthecompany'saccountsreceivablewillreflectacreditreductionforthesameamount,becauseABCDEFGHSoftwarenolongerhasthatamountreceivablefromitsclient. Tomaintaintheaccountingequation'snet-zerodifference,oneassetaccountmustincreasewhileanotherdecreasesbythesameamount.Thenewbalanceforthecashaccount,afterthenetchangefromthetransaction,willthenbereflectedinthebalancecategory. 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