Why General Ledger Is Important For The Branch?
What Is a General Ledger?
A general ledger represents the record-keeping system for a company’s financial data with debit and credit account records validated by a trial balance. The general ledger provides a record of each financial transaction that takes place during the life of an operating company.
The general ledger holds account information that is needed to prepare the company’s financial statements, and transaction data is segregated by type into accounts for assets, liabilities, owners’ equity, revenues, and expenses.
How a General Ledger Works
A general ledger is the foundation of a system used by accountants to store and organize financial data used to create the firm’s financial statements. Transactions are posted to individual sub-ledger accounts, as defined by the company’s chart of accounts.
The transactions are then closed out or summarized to the general ledger, and the accountant generates a trial balance, which serves as a report of each ledger account’s balance. The trial balance is checked for errors and adjusted by posting additional necessary entries, and then the adjusted trial balance is used to generate the financial statements.
Reasons Why You Need a General Ledger
Obviously, it’s always up to you (and your financial advisor) to decide what is right for your small business. You may be doing just fine without a General Ledger, in which case you may not want to boil the ocean! But in case you’re wondering, there are seven compelling reasons why you may want to use a General Ledger for your small business:
- It provides an accurate record of all financial transactions
- It helps you compile a trial balance, so your books balance
- It makes filing tax returns easy because you have expenses and income is in one place
- It reports real revenue and expenses so that you can stay on top of spending
- It helps you spot unusual transactions immediately
- It helps you identify (and stop) fraud
- It aids in compiling key financial statements which are crucial for evaluating your profitability, liquidity, and overall financial health. These include the cash flow statement, income statement and balance sheet.
Examples of General Ledger Accounts
Some of the more common balance sheet accounts and how they are further arranged in the general ledger include:
- asset accounts such as Cash, Accounts Receivable, Inventory, Investments, Land, and Equipment
- liability accounts including Notes Payable, Accounts Payable, Accrued Expenses Payable, and Customer Deposits
- stockholders’ equity accounts such as Common Stock, Retained Earnings, Treasury Stock, and Accumulated Other Comprehensive Income
Some of the general ledger income statement accounts and how they are arranged include:
- operating revenue accounts such as Sales and Service Fee Revenues
- operating expense accounts including Salaries Expense, Rent Expense, and Advertising Expense
- nonoperating or other income accounts such as Gain on Sale of Assets, Interest Expense, and Loss on Disposal of Assets
General Ledger Control Accounts
Some general ledger accounts can become summary records and will be referred to as control accounts. In that situation all of the detail that supports the summary amounts in one of the control accounts will be available in a subsidiary ledger.
Examples of General Ledger Control Accounts
A common example of a general ledger account that can become a control account is Accounts Receivable. The summary amounts are found in the Accounts Receivable control account and the details for each customer’s credit activity will be contained in the Accounts Receivable subsidiary ledger.
Types of general ledger accounts
Broadly, the general ledger contains accounts that correspond to the income statement and balance sheet for which they are destined.
The income part of the income statement might include totals from general ledger accounts for cash, inventory and accounts receivable — money owed to the business — sometimes broken down into departments such as sales and service and related expenses. The expense side of the income statement might be based on GL accounts for interest expenses and advertising expenses.
Other GL accounts summarize transactions for asset categories, such as plant and equipment, and liabilities, such as accounts payable and notes, or loans.
Other types of GL accounts
While the above accounts appear in every general ledger, other accounts may be used to track special categories, perform useful calculations or summarize groups of accounts. The latter type is called a control account.
For example, an accountant might use a T-account — so named because of its T shape — to track just the debits and credits in a particular general ledger account.
Accounting cycle process
Following the rules of double-entry bookkeeping, each entry in the general ledger must appear in two places: once as a debit and once as a corresponding credit. And the two added together must equal zero.
The terms debit and credit do not have their commonplace meanings, and whether each adds to or subtracts from an account’s total depends on the type of account. For example, debiting an income account causes it to increase, while the same action on an expense account results in a decrease.
General ledger reconciliation
At the end of each accounting period, a trial balance is calculated by listing all of the debit and credit accounts and their totals, and separating those with debit balances from the ones with credit balances. The debit and credit accounts are then totaled to verify that the two are equal. If they aren’t, the accountant can look for errors in the accounts and journals.
However, the trial balance cannot serve as proof that the other records are free of errors. For example, if journal entries for a debit and its corresponding credit were never recorded, the totals in the trial balance would still match.
Companies use a general ledger reconciliation process to find and correct such errors in the accounting records.
Controlling Accounts vs. Subsidiary ledger
For a large organization, a general ledger can be extremely complicated. In order to simplify the audit of accounting records or the analysis of records by internal stakeholders, subsidiary ledgers can be created.
A subsidiary ledger (sub-ledger) is a sub-account related to a GL account that traces the transactions corresponding to a specific company, purchase, property, etc. If a GL account includes sub-ledgers, they are called controlling accounts.
For example, Companies X, Y, and Z are the clients of Company A. For accounting purposes, Company A may create three sub-ledger accounts corresponding its three clients under account receivables (controlling accounts) to trace the amounts expected to be received from each client.