Definition
The General Ledger (GL) is the master set of accounts that summarizes all transactions occurring within an organization’s accounting system. This ledger acts as the central repository for accounting data transferred from all sub-ledgers or modules, like accounts payable, accounts receivable, and payroll. The primary purpose of the General Ledger is to provide the detailed information necessary to produce financial statements.
Examples
Example 1: Recording a Sale
A company sells $5,000 worth of goods to a customer. The transaction would be recorded as follows:
- Credit: Revenue (Sales) Account - $5,000
- Debit: Accounts Receivable - $5,000
Example 2: Payment of Salary
A firm pays its employees’ monthly salaries amounting to $15,000. This would be recorded in the General Ledger by:
- Credit: Cash Account - $15,000
- Debit: Salaries Expense - $15,000
Frequently Asked Questions (FAQs)
What is the purpose of a General Ledger?
The General Ledger serves as the central repository for all financial transactions within an organization, enabling the accurate preparation of financial statements such as the balance sheet and income statement.
How does the General Ledger differ from the sub-ledgers?
Sub-ledgers contain detailed transaction information for specific areas like accounts payable, accounts receivable, and payroll, while the General Ledger provides a summarized overview of all these transactions.
Is there a difference between a nominal ledger and a general ledger?
No, both terms are often used interchangeably. The nominal ledger primarily refers to revenue and expense accounts, while the General Ledger includes all asset, liability, equity, revenue, and expense accounts.
How often should the General Ledger be updated?
Ideally, the General Ledger should be updated in real-time or at the end of each business day. Month-end closing processes also involve comprehensive updates for accuracy.
What is a trial balance in the context of the General Ledger?
A trial balance is a report that verifies the debits and credits recorded in the General Ledger, ensuring that the books are balanced before generating financial statements.
Related Terms
Nominal Ledger
A Nominal Ledger, often synonymous with the General Ledger, typically refers to the section of the ledger that contains revenue and expense accounts.
Accounts Payable
Accounts Payable is a sub-ledger that tracks amounts a company owes to suppliers for items or services purchased on credit.
Accounts Receivable
The Accounts Receivable ledger tracks amounts owed to the company by customers due to credit sales.
Trial Balance
A Trial Balance is a bookkeeping worksheet in which the balance of all ledgers is compiled into debit and credit columns to ensure that a company’s ledgers are mathematically correct.
Financial Statements
Reports such as the balance sheet, income statement, and cash flow statement that summarize a company’s financial conditions and performance over a period.
Online References
- Investopedia – General Ledger
- Accounting Tools – General Ledger
- Corporate Finance Institute – General Ledger
Suggested Books for Further Studies
- Accounting Made Simple: Accounting Explained in 100 Pages or Less by Mike Piper
- Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports by Thomas Ittelson
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
Accounting Basics: “General Ledger” Fundamentals Quiz
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