Hemel & Aarde Village
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c/o R43 & R320, Shop 3B, Hemel and Aarde Road, Hermanus, 7201
Call Us
Saturday: 9:00 - 13:00
In accounting, a general ledger (GL) is a record of all the financial transactions of a business for a given financial period, recorded in general ledger accounts.
The crucial importance of a general ledger for a business is expressed in term such as:
Prior to the computer era, accountants and bookkeepers recorded financial transactions in the general ledger by hand. Nowadays, most advanced, and highly developed accounting software is used.
General ledger (GL) accounts are accounts that record all the financial transactions of a business, presenting detailed information about each financial transaction, such as the date, the description of the transaction, and the amount involved.
A general ledger comprises five different types of accounts such as:
Typically, GL accounts are arranged with the balance sheet accounts (assets, liabilities, and owners’ equity) appearing first, followed by the income statement accounts (revenue and expenses).
All the GL accounts with their closing balances are listed in a trial balance, validating the general ledger’s accuracy, and confirming that all the debit balances equal the credit balances.
After the validation of all the GL accounts, a business is ready and able to compile its financial statements such as the income statement, balance sheet, and other financial reports as deemed necessary.
Usually, in small businesses, all the data pertaining to financial transactions are recorded directly in the general ledger accounts.
Contrarily, a big company with a large number of transactions makes use of general ledger control accounts that contain summaries of detailed information derived from subsidiary ledgers.
Simply put, when there is a GL control account for a certain type of transaction, there is a corresponding subsidiary ledger.
A subsidiary ledger, also referred to as a sub-ledger, records detailed information of related financial transactions and accounts. The information is summarised from time to time and posted to a general ledger control account.
Hence, a subsidiary ledger summarises and reports the totals of all related accounts with a single entry, supporting the balance in a particular GL control account. For instance, the inventory sub-ledger supplies the details to support the balance of the inventory general ledger control account.
Typically, subsidiary ledgers are used when high transaction volumes occur regarding specific types of transactions. Therefore, sub-ledgers are not used for all types of transactions.
Examples of subsidiary ledgers (sub-ledgers) are:
The following two key concepts, double-entry accounting, and the accounting equation are crucially important in the general ledger process.
Financial transactions are posted in the general ledger accounts or accounts in the sub-ledgers by making use of double-entry transactions, referred to as journal entries.
Each journal entry is based on the double-entry system, requiring that every transaction must be recorded in a minimum of two accounts. One account is debited (the left-hand side of the account) with a certain amount and the second account is credited (the right-hand side of the account) with the same amount.
A journal entry can also comprise more than one debit and/or more than one credit. However, the total of all the debits and credits of a journal entry must always be in balance.
The purpose of double-entry accounting, also referred to as balancing the books, is to ensure that the accounting equation (assets = liabilities + owners’ equity) is always in balance.
The accounting equation is the foundation of double-entry accounting. If the sum of the debits for all the accounts is not equal to the sum of all the credits of the accounts, the equation will not balance, indicating that one mistake or more has been made in the recording process.
There are various reasons that can be mentioned to indicate the importance of a general ledger.
Reconciling a general ledger is to ensure that each financial transaction has an equal and opposite transaction, confirming that all the debit and credit entries are recorded correctly.
Reasons, why a general ledger (GL) is important, are, among others:
The regular reconciliation of the general ledger is important for the following reasons:
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