Traditionally, accountants manually recorded financial transactions in the general ledger using the double-entry accounting method.
With the introduction of computers, recording transactions became much easier. You no longer had to record in books; instead, you could use excel sheets or intelligent accounting software.
Although the method of recording transactions has evolved, the importance of the general ledger has not. It is a necessary accounting record for the creation of financial reports, which are critical for assessing the health of a business.
What is General Ledger
A General Ledger (GL) is an accounting term that refers to a record of all past transactions of a company that is organized by accounts. All debit and credit transactions affecting them are recorded in General Ledger (GL) accounts. They also include detailed information about each transaction, such as the date, description, and amount, as well as some descriptive information about what the transaction was.
A general ledger in accounting software sorts all transaction information through the accounts. It is also the primary source for the company’s trial balance and financial statements. A trial balance validates the ledger’s accuracy by confirming that the sum of all debit accounts equals the sum of all credit accounts.
General ledger account
A general ledger account (GL account) is the most important component of a general ledger. A GL account keeps track of all transactions associated with that account. The transactions concern various accounting elements such as assets, liabilities, equity, revenues, expenses, gains, and losses.
Cash and account receivables, for example, are assets of the company. Each asset will have its own GL account on the ledger.
Subsidiary ledger vs. Controlling Accounts
A general ledger can be extremely complicated for a large organization. Subsidiary ledgers can be created to facilitate the audit of accounting records or the analysis of records by internal stakeholders.
A subsidiary ledger (sub-ledger) is a sub-account linked to a GL account that tracks transactions related to a specific company, purchase, property, and so on. Controlling accounts are used when a GL account includes sub-ledgers.
Bank X, Y, and Z, for example, are Company A bankers. For accounting purposes, Company A may create three sub-ledger accounts under Bank balances (controlling accounts) corresponding to its three bankers to track the balances of each bank.
How It Works
Double-Entry Bookkeeping and General Ledgers
A general ledger is a summary of all transactions recorded using the double-entry bookkeeping method. Each transaction in this method affects at least two accounts; one is debited, while the other is credited. The total amount of debit must always equal the total amount of credit.
The Accounting Equation is a mathematical representation of the double-entry accounting system and is known as Assets = Liabilities + Shareholder’s Equity.
Link to Balance Sheet and Income Statement
A General Ledger (GL) is the data source used to construct the Balance Sheet and the Income Statement because it records all transactions that affect a business’s accounting elements such as Assets, Liabilities, Equity, Expenses, and Income.