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.

  1. What is a ledger entry?
  2. Types of ledger entries
  3. Uses of general ledger account
  4. Example of a General Ledger
  5. Frequently Asked Questions

General Ledger Entry

What is a ledger entry?

The ledger is the principal book of entry in which a 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.

Businesses use the general ledger to keep track of their financial transactions and also to prepare financial reports, including the trial balance, income statement, and cash flow statement.

Each account is a unique record summarizing each type of asset, liability, equity, revenue, and expenses. A chart of accounts lists all of the accounts in the general ledger.

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, and service fees.
  • Operating expenses. Such as rent, salaries, and 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 accounts 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 accounts 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.

These include:

  • Operating revenues
  • Operating expenses
  • Non-operating revenues or gains
  • Non-operating expenses and losses

They are also known as temporary accounts since the balances in these accounts will be closed at the end of the accounting year.

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.

Debit transactions appear on the left while credit amounts appear on the right. The amounts in the general ledger add to an equal amount on both the debit and credit sides.

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:

General Ledger

Date Description Acc Number Account Name Debit Credit
March 1 Owner contribution worth $44,900 in equipment, cash and car 101 Cash $10,000
  405 Equipment $4,000
  102 Asset $30,900
  103 Capital $44,900
March 2 Paid for Facebook advert $500 322 Advertising $500
  Sold goods for cash $20,000 101 Cash $20,000
  200 Accounts Receivable $20,000
March 3 Paid Agency Suppliers $5,000 by check 210 Accounts Payable $5,000
  101 Cash $5,000
March 4 Bought equipment from AIM Tools worth $25,000 and paid $5,000 and remainder 405 Equipment $25,000
  210 Accounts Payable $20,000
  101 Cash $5,000

 

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 Frequently Asked Questions

What is the Difference Between a General Ledger and a Balance Sheet?

A general ledger is a record of all transactions an entity has ever had from its first day. Its transactions are extracted from the daily journal by following a system of credits and debits.

On the other hand, a balance sheet details an entity’s assets and liabilities at a particular time.

Why is a General Ledger Important?

You need a general ledger to record all financial transactions for your business entity. For instance, you can use it to compile a trial balance, so you can balance your books.

It also makes it easy to file taxes because your transactions are recorded in one place. Finally, and most important, it helps you track your expenses and revenues.

What are the 5 Types Of General Ledger Accounts?

The five common categories in a general ledger account are capital, assets, expenses, liabilities, and income. Capital is the entity’s investment plus the net of the entity’s income and expenses.

The assets are the valuables the entity owns, while the liabilities are what the entity is owed. Income is what an entity has earned, while expenses are what the entity has spent.

What is the Difference Between a General Journal and a General Ledger?

In the general journal, you will find a summary of every recorded transaction. On the other hand, a general journal contains the original transactions entries detailing most low-volume transactions. When a transaction occurs, you first have to record it in a general journal.

How Do I Learn General Ledger Accounting?

You can learn general ledger accounting by taking accounting classes. You can do that if you want to start a career in accounting. The other option is through apprenticeship under a qualified accountant. That works best if you have invested in accounting software.

Your accountant can then work with you to generate your business ledgers when using the accounting software. And if working under an accountant is not an option for you, you can use the accounting software tutorials to learn basic general ledger accounting.

What is a General Ledger in Accounting?

General Ledger Accounts (GLs) are numbered accounts businesses use to keep track of their financial transactions. Entities also use GLs to prepare their financial reports.

The most common GLs you are likely to encounter are revenues, expenses, and transfers. The complete list of all GLs is a Chart of Accounts. Overall, a general ledger holds a business’s financial data, and accountants use it to record all financial transactions in a business.

What are the 4 Sections in a General Ledger?

A general ledger will have four parts: the chart of accounts, financial transactions, account balances, and account periods. Accountants use the term “general ledger accounts” when referring to the “chart of accounts.”

How Do You Write a General Ledger?

The first step to creating a general ledger is to divide each account into two columns. The left column will have debits, while the right column will have credits.

The assets and expenses go into the left column of your ledger, while equity, liabilities, and revenue go to the right column of the ledger.

If you have difficulty creating a ledger, you can use accounting software. It will guide you on which side of the ledger to make your accounting entries.

Conclusion

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.

 

Automated Data Capture, Extraction & Analysis – Solutions for FinTech