When handling business financial transactions or bookkeeping, it is standard practice to use a journal ledger and general ledger. Entries from the journal ledger go into the general ledger. Here is what you need to know about the general ledger.
- What is a ledger entry?
- Types of ledger entries
- Uses of general ledger account
- Example of a General Ledger
What is a ledger entry?
The ledger is the principal book of entry in which business records its financial transactions. The general ledger accounts record, organize and classify the transactions. The line items in each account are called general ledger entries.
Types of ledger entries
The various types of ledger entries or accounts are organized into the following common accounts.
- Asset accounts. Such as cash, accounts received inventory, investments, land, and equipment.
- Liability accounts. Includes note payable, accounts payable, accrued expenses payable, and customer deposits.
- Stockholder’s equity accounts. Such as common stock, retained earnings, treasury stock, and accumulated other comprehensive income.
- Operating revenues. Such as sales, service fees.
- Operating expenses. Such as rent, salaries, depreciation expenses.
- Non-operating revenues and gains (investment income, gain, and disposal of vehicles)
- Non-operating expenses and losses (interest expense, loss on disposal of equipment).
These accounts are further divided into two types as shown below:
Balance sheet account
The first three classifications of general account are referred to as balance sheet accounts since the balances in these accounts are reported on the financial statement which is known as the balance sheet.
They are as follows;
- Assets accounts
- Liabilities accounts
- Stockholder’s (or owners) equity
The balances in these accounts will not be closed at the end of an accounting year. Instead, they are carried forward to the next accounting year. These accounts are, therefore, referred to as permanent accounts.
Income statement accounts
The four remaining classifications of account are referred to as income statement accounts since the amounts in the accounts will be reported on the financial statement known as the income statement.
- Operating revenues
- Operating expenses
- Non-operating revenues or gains
- Non-operating expenses and losses
Uses of general ledger account
The accounting general ledger is a report that provides a detailed description of every general ledger account and the transactions that make up the balance in that account.
The general ledger account holds all the financial information used to create the income statement and balance sheet reports and serves several main purposes in the financial operations of the business.
How is the general ledger used?
The general ledger has two sections: debit and credit. It is here that a company’s bookkeeper records transactions taken from the general journal. It is the first step in the accounting cycle. The second step involves general ledger posting- transferring transaction details from various ledger accounts into a general ledger.
We use the double-entry principle (or T-accounts) to have the entries on both the debit and credit sides of the general ledger. The amount in a debit account also appears in the respective account on the credit side and vice versa.
Example of a General Ledger
Here is an example of a general ledger for a company.
On March 1, 2020, an owner contributed to the company by way of cash, equipment, and car, all worth $44,900. The company sold goods worth $20,000 on March 2, 2020, with the customer paying in cash. On March 3, the company paid its supplier $5,000 via bank check. Another transaction happened on March 4.
The general ledger entry using the double-entry model will be as follows:
|Date||Description||Acc Number||Account Name||Debit||Credit|
|March 1||Owner contribution worth $44,900 in equipment, cash and car||101||Cash||$10,000|
|March 2||Paid for Facebook advert $500||322||Advertising||$500|
|Sold goods for cash $20,000||101||Cash||$20,000|
|March 3||Paid Agency Suppliers $5,000 by check||210||Accounts Payable||$5,000|
|March 4||Bought equipment from AIM Tools worth $25,000 and paid $5,000 and remainder||405||Equipment||$25,000|
All the other entries will follow this pattern. If you are using a manual accounting system, you prepare journal entries first before transferring that onto the general ledger. In modern accounting, companies have access to accounting software that makes the process much faster and less tedious.
General ledger entries help in summarizing all the transactions that enable one to create accurate financial statements. It is the first step to ensuring accurate accounting.