General Ledger Definition - Investopedia

The general ledger is the foundation of a company's double-entry accounting system. General ledger accounts encompass ... CorporateFinance&Accounting Accounting PartOf TheEvolutionofAccountingandAccountingTerminology ExploreTheGuide Overview TermsA-B Overview AbsorptionCosting Amortization AverageCollectionPeriod BillofLading TermsC Overview CashBook CostofDebt CostofEquity Cost-Volume-Profit(CVP)Analysis CurrentAccount TermsD-E Overview DaysPayableOutstanding Depreciation DoubleDecliningBalanceDepreciationMethod EBITDA EconomicOrderQuantity TermsF-M Overview FactorsofProduction FiscalYear(FY) GeneralLedger JustinTime(JIT) TermsN-O Overview NetOperatingLoss(NOL) NetRealizableValue(NRV) NoncurrentAssets OperatingCost OperatingProfit TermsP-S Overview ProductionCosts ProFormaInvoice RetainedEarnings RevenueRecognition SunkCost TermsT-Z Overview TripleBottomLine(TBL) VariableCost Work-in-Progress(WIP) Write-Off Year-Over-Year(YOY) Zero-BasedBudgeting(ZBB) TableofContents Expand WhatIsaGeneralLedger? HowItWorks ItsRoleinDouble-EntryAccounting WhatItTellsYou BalanceSheetExample IncomeStatementExample GeneralLedgerFAQs WhatIsaGeneralLedger? Ageneralledgerrepresentstherecord-keepingsystemforacompany’sfinancialdata,withdebitandcreditaccountrecordsvalidatedbyatrialbalance.Itprovidesarecordofeachfinancialtransactionthattakesplaceduringthelifeofanoperatingcompanyandholdsaccountinformationthatisneededtopreparethecompany’sfinancialstatements.Transactiondataissegregated,bytype,intoaccountsforassets,liabilities,owners’equity,revenues,andexpenses. KeyTakeaways Thegeneralledgeristhefoundationofacompany’sdouble-entryaccountingsystem.Generalledgeraccountsencompassallthetransactiondataneededtoproducetheincomestatement,balancesheet,andotherfinancialreports.Generalledgertransactionsareasummaryoftransactionsmadeasjournalentriestosub-ledgeraccounts.Thetrialbalanceisareportthatlistseverygeneralledgeraccountanditsbalance,makingadjustmentseasiertocheckanderrorseasiertolocate. 1:37 GeneralLedger HowaGeneralLedgerWorks Ageneralledgeristhefoundationofasystememployedbyaccountantstostoreandorganizefinancialdatausedtocreatethefirm’sfinancialstatements.Transactionsarepostedtoindividualsub-ledgeraccounts,asdefinedbythecompany’schartofaccounts. Thetransactionsarethenclosedoutorsummarizedtothegeneralledger,andtheaccountantgeneratesatrialbalance,whichservesasareportofeachledgeraccount’sbalance.Thetrialbalanceischeckedforerrorsandadjustedbypostingadditionalnecessaryentries,andthentheadjustedtrialbalanceisusedtogeneratethefinancialstatements. HowaGeneralLedgerFunctionsWithDouble-EntryAccounting Ageneralledgerisusedbybusinessesthatemploythedouble-entrybookkeepingmethod,whichmeansthateachfinancialtransactionaffectsatleasttwosub-ledgeraccounts,andeachentryhasatleastonedebitandonecredittransaction.Double-entrytransactions,called“journalentries,”arepostedintwocolumns,withdebitentriesontheleftandcreditentriesontheright,andthetotalofalldebitandcreditentriesmustbalance. Theaccountingequation,whichunderliesdouble-entryaccounting,isasfollows: Assets − Liabilities = Stockholders’ Equity \text{Assets}-\text{Liabilities}=\text{Stockholders'Equity} Assets−Liabilities=Stockholders’ Equity Thebalancesheetfollowsthisformatandshowsinformationatadetailedaccountlevel.Forexample,thebalancesheetshowsseveralassetaccounts,includingcashandaccountsreceivable,initsshort-termassetssection. Thedouble-entryaccountingmethodworksbasedontheaccountingequation’srequirementthattransactionspostedtotheaccountsontheleftoftheequalsignintheformulamustequalthetotaloftransactionspostedtotheaccount(oraccounts)ontheright.Eveniftheequationispresenteddifferently(suchasAssets=Liabilities+Stockholders’Equity),thebalancingrulealwaysapplies. WhatDoesaGeneralLedgerTellYou? Thetransactiondetailscontainedinthegeneralledgerarecompiledandsummarizedatvariouslevelstoproduceatrialbalance,incomestatement,balancesheet,statementofcashflows,andmanyotherfinancialreports.Thishelpsaccountants,companymanagement,analysts,investors,andotherstakeholdersassessthecompany’sperformanceonanongoingbasis. Whenexpensesspikeinagivenperiod,oracompanyrecordsothertransactionsthataffectitsrevenues,netincome,orotherkeyfinancialmetrics,thefinancialstatementdataoftendoesn’ttellthewholestory.Inthecaseofcertaintypesofaccountingerrors,itbecomesnecessarytogobacktothegeneralledgeranddigintothedetailofeachrecordedtransactiontolocatetheissue.Attimesthiscaninvolvereviewingdozensofjournalentries,butitisimperativetomaintainreliablyerror-freeandcrediblecompanyfinancialstatements. ABalanceSheetTransactionExample Ifacompanyreceivespaymentfromaclientfora$200invoice,forexample,thecompanyaccountantincreasesthecashaccountwitha$200debitandcompletestheentrywithacredit,orreduction,of$200toaccountsreceivable.Theposteddebitandcreditamountsareequal. Inthisinstance,oneassetaccount(cash)isincreasedby$200,whileanotherassetaccount(accountsreceivable)isreducedby$200.Thenetresultisthatboththeincreaseandthedecreaseonlyaffectonesideoftheaccountingequation.Thus,theequationremainsinbalance. AnIncomeStatementTransactionExample Theincomestatementfollowsitsownformula,whichcanbewrittenasfollows: Revenue − Expenses = Net Income (NI) or Net Profit \text{Revenue}-\text{Expenses}=\text{NetIncome(NI)orNetProfit} Revenue−Expenses=Net Income (NI) or Net Profit Itispossibleforanaccountingtransactiontoimpactboththebalancesheetandtheincomestatementsimultaneously.Forexample,assumethatacompanybillsitsclient$500.Theaccountantwouldenterthistransactionintotheaccountingledgerbypostinga$500debit(increase)toaccountsreceivable(abalancesheetassetaccount)anda$500credit(increase)torevenue,whichisanincomestatementaccount.Debitsandcreditsbothincreaseby$500,andthetotalsstayinbalance. WhatIsthePurposeofaGeneralLedger? Inaccounting,ageneralledgerisusedtorecordallofacompany’stransactions.Withinageneralledger,transactionaldataisorganizedintoassets,liabilities,revenues,expenses,andowner’sequity.Aftereachsub-ledgerhasbeenclosedout,theaccountantpreparesthetrialbalance.Thisdatafromthetrialbalanceisthenusedtocreatethecompany’sfinancialstatements,suchasitsbalancesheet,incomestatement,statementofcashflows,andotherfinancialreports.  IsaGeneralLedgerPartoftheDouble-EntryBookkeepingMethod? Yes,acompanythatusesadouble-entrybookkeepingmethodusesthegeneralledgermethodofstoringcompanyfinancialdata.Specifically,double-entrybookkeepingiswheneachtransactionimpactsatleastonedebitandonecredittransaction.Inotherwords,eachtransactionappearsintwocolumns,adebitcolumnandacreditcolumn,whosetotalsmustbalance.Underthisbalancingrule,thefollowingequationapplies:Assets-Liabilities=Stockholders’Equity. WhatIsanExampleofaGeneralLedgerEntry? Considerthefollowingexamplewhereacompanyreceivesa$1,000paymentfromaclientforitsservices.Theaccountantwouldthenincreasetheassetcolumnby$1,000andsubtract$1,000fromaccountsreceivable.Theequationremainsinbalance,astheequivalentincreaseanddecreaseaffectoneside—theassetside—oftheaccountingequation.  ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. IntuitQuickbooks."WhatisaGeneralLedgerandWhyisItImportant?"AccessedJan.3,2022. IntuitQuickbooks."ASmallBusinessOwner'sGuidetoDouble-EntryBookkeeping."AccessedJan.3,2022. CFAInstitute."UnderstandingIncomeStatements."AccessedJan.3,2022. 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Provider Name Description PartOf TheEvolutionofAccountingandAccountingTerminologyGuide HowDidtheFieldofAccountingEvolve? 1of35 WhatIsAbsorptionCosting? 2of35 Amortization 3of35 AverageCollectionPeriodDefinition 4of35 BillofLading 5of35 CashBook 6of35 CostofDebt 7of35 WhatIstheCostofEquity? 8of35 Cost-Volume-Profit(CVP)Analysis 9of35 WhatIstheCurrentAccount? 10of35 HowtoUnderstandDaysPayableOutstanding 11of35 DepreciationDefinition 12of35 HowtheDoubleDecliningBalanceDepreciationMethodWorks 13of35 EarningsBeforeInterest,Taxes,Depreciation,andAmortization(EBITDA) 14of35 EconomicOrderQuantity(EOQ)Definition 15of35 WhatAreFactorsofProduction? 16of35 FiscalYear(FY) 17of35 HowGeneralLedgersWork 18of35 WhatIsJust-in-Time(JIT)? 19of35 NetOperatingLoss(NOL) 20of35 NetRealizableValue(NRV) 21of35 WhatAreNoncurrentAssets? 22of35 WhatAreOperatingCosts? 23of35 OperatingProfitDefinition 24of35 WhatAreProductionCosts? 25of35 ProFormaInvoiceDefinition 26of35 RetainedEarningsDefinition 27of35 RevenueRecognitionAsanAccountingPrinciple 28of35 SunkCost 29of35 TripleBottomLine(TBL) 30of35 WhatIsaVariableCost? 31of35 WhatWork-in-ProgressReallyMeans 32of35 WhatIsaWrite-OffinBusinessAccounting? 33of35 WhatDoesYear-Over-Year(YOY)Mean? 34of35 Zero-BasedBudgeting(ZBB) 35of35 RelatedTerms WhatIsReconciliationinAccounting? Reconciliationisanaccountingprocessthatcomparestwosetsofrecordstocheckthatfiguresarecorrect,andcanbeusedforpersonalorbusinessreconciliations. more AccountingDefinition Accountingistheprocessofrecording,summarizing,analyzing,andreportingfinancialtransactionsofabusinesstooversightagencies,regulators,andtheIRS. more WhatIstheAccountingEquation? Theaccountingequationdefinesacompany'stotalassetsasthesumofitsliabilitiesandshareholders'equity. more AccountsPayable(AP) "Accountspayable"(AP)referstoanaccountwithinthegeneralledgerrepresentingacompany'sobligationtopayoffashort-termdebttoitscreditorsorsuppliers. more FinancialStatementAnalysis Financialstatementanalysisistheprocessofanalyzingacompany'sfinancialstatementsfordecision-makingpurposes. more AccruedRevenueDefinition Accruedrevenue—anassetonthebalancesheet—isrevenuethathasbeenearnedbutforwhichnocashhasbeenreceived. more PartnerLinks RelatedArticles Accounting TheDifferenceBetweenaGeneralLedgerandaGeneralJournal CorporateFinance&Accounting LearnAboutthe8ImportantStepsintheAccountingCycle Accounting WhatIsDoubleEntryBookkeepingandHow'sItFitinGeneralLedger? FinancialStatements UnderstandingtheCashFlowStatement FinancialAnalysis HowDoesDepreciationAffectCashFlow? Accounting HowtoUseExcelasaGeneralAccountingLedger