A company keeps track of its financial transactions with the general ledger. This fundamental aspect of accounting plays a crucial role in maintaining financial records and generating key reports for decision-makers.
Let’s take a closer look at what a general ledger is and explore how it works and look at some examples.
General ledger definition
A general ledger is a record-keeping system that tracks a company’s financial data. It serves as the foundation of the double-entry accounting system and is all financial transaction that occurs during a business’s operations. In other words, general legder is basically your accounting and all data and reports.
The general ledger organizes transaction data into categories such as assets, liabilities, owners’ equity, revenues, and expenses.
Why is a general ledger important?
Financial reporting
The general ledger plays an important role in generating various financial reports, including the income statement, balance sheet, and statement of cash flows. These reports provide insights for stakeholders about company’s performance.
Detailed record
In case of financial discrepancies or accounting errors, the general ledger serves as a detailed record. It allows for a review of transactions, ensuring accurate and reliable financial statements.
Real-life examples
Let us take a look at some real-life examples on how to use a general ledger.
Balance sheet transaction
Scenario: A company receives a $600 payment from a client for an invoice.
Journal Entry: Debit increases the cash account by $600, and credit reduces accounts receivable by $200.
Outcome: The equation (Assets = Liabilities + Stockholders’ Equity) remains balanced.
Income statement transaction
Scenario: Company receives payment for the sale of a product.
Process: Cash received is recorded in net sales, with cost of sales subtracted to calculate gross profit.
Outcome: The income statement shows revenues, expenses, and net income for the reporting period.