A General Ledger, commonly abbreviated as GL, is a systematic record-keeping system that keeps track of all the financial transactions of an organisation that are needed to prepare complete financial reports. It registers a numbered of transactions that are unique by nature and falls into the following types:
- Debits: Assets, Losses, Expenses, Dividends
- Credits: Income, Gains, Liabilities, Revenue, Equity
Every financial transaction of the business would have a ‘double-entry’- one debit entry and one credit entry- in General Ledger. Such transactions maintain the basic accounting equation to keep the two balances tallied. The equation is:
Assets = Liabilities + (Owners’ or Shareholders’ Equity)
For example, when the company pays S$ 250 to settle the water bill, General Ledger will be updated by the corporate accountant as follows:
- Debit S$ 250 to Utility Expense Account
- Credit S$ 250 in Cash Account,
making the total of all debit and credit accounts equal at all times and validated by the trial balance within the end of every financial year.
It is also important to note that any information recorded in General Ledger is not budgetary terms; because they are actual monetary values of business spending or receiving. Therefore, when the business gets complicated and more extensive, on the other hand, General Ledger will keep getting more challenging to manage; because a General Ledger of an enterprise can add up to 1000s of financial accounts with the company’s growth. General Ledger contains proof of each and every financial transaction that the company made, making it one of the most manage-worthy record-keeping books during any business’ operating lifetime regardless of their industry or complexity. Since General Ledger is the most comprehensive record of any company’s entire financial transaction history, our article will be educating you about why it plays a key role in your financial archives and how you can optimise it through technological solutions.
Why is General Ledger the most crucial record keeper?
There are two main functions that a General Ledger would render to its company. Firstly, the trial balance that is usually balanced off during the end of the financial year gives insightful revelations on business spending. Compiling the trial balance can help on many occasions; for instance, unusual financial figures will prompt the accountant to seek fraudulent spending or discrepancies in business transactions. They can pinpoint errors or suspicious monetary statistics that must be investigated upon. Secondly, it functions as the primary source for financial decision-making by the enterprise’s investors.
There are other compelling reasons why you should maintain your General Ledger with utmost care and relevance, such as:
- It is the ultimate guide to all your historical financial data
- It provides documents required to file your tax returns easily
- It provides proof as to whether your business spending is efficient or not
- You can study General Ledger to learn the profitability and liquidity of your corporate resources
- It guides you in evaluating the end-to-end financial health of your company
- It encompasses all the data needed to prepare comprehensive financial records
How a General Ledger operates in an organisation?
General Ledger can be identified as the master of accounting documentation since it holds all transactional information- even the most minute transactions up-to-the-point. As the general ledger is updated after every transaction as explained before, the same transactions are updated in sub-ledger accounts (subsidiary ledgers) as defined by the chart of accounts (COA) of a company. COA is an organisational tool that acts as an index to all financial accounts mentioned in General Ledger.
Let’s have a quick look at the accounting cycle to better understand how General Ledger operates in a business. Every time a transaction takes place in your business, it will usually undergo the following sequence of steps:
- Identifying the type of transaction (i.e. sales transaction, expense transaction, capital transaction)
- Initially recording the transaction in one of the Journals. There are seven types of journals in accounting.
- Sales Journal
- Cash Receipts Journal
- Purchase Journal
- Purchase Return Journal
- Cash Payment Journal
- Sales Return Journal
- Journal Proper
- Once recorded in the journals, the transaction details must be posted to General Ledger.
- Calculating the ‘Unadjusted Trial Balance’- it showcases all the unadjusted balances of the corporate financial accounts.
- The accounting specialists tests and analyses whether the debits and credits balance off using accrual accounting tools.
- The bookkeeper is updated of all discrepancies, and the journal entries are amended as required.
- Financial statements are prepared to get a summated view of the company’s financial health. Statements are prepared during the end of each fiscal year like the Income Statement, Cash Flow Statement and the Balance Sheet.
- Closing the financial books on the predetermined closing dates of the fiscal year.
The Anatomy of a General Ledger
As the backbone of any organisations’ financial systems, the general ledger has a complex structure. It is the foundation stone for preparing the most important financial documents within the end of a financial period. Traditionally a general ledger would have columns for a numbered list to address every transaction, account titles, the debit balances and a credit balance; as shown below
Generally, you will find a General Ledger account that can be parallel to the balance sheet and income statement which are prepared at the end of every financial accounting year. The money owed to the business by other stakeholders will be recorded in the income column of this ledger. Also, it can be subcategorised to accounts such as cash, accounts receivable and inventory. On the other side, expenses can be recorded—for example, advertising expenses and maintenance expenses.
Additionally, there can be accounts such as Plant, Property and Equipment that keeps track of the non-current assets of the company, liabilities account, notes and loans, accounts payable ledgers etc. General Ledger also maintains control accounts which are maintained to keep track of special or unorthodox financial transactions.
Given below is briefing of the list of accounts that you will commonly see in a General Ledger:
Asset Accounts – Fixed Assets Account, Cash Account, Accounts Receivable
Revenue Accounts – Fees Account, Sales Account
Liability Accounts – Bonds Payable Account, Accounts Payable, Long Term Debt Account
Expense Accounts – Depreciation Account, Wages Account, Utility Expense Account
Equity Accounts – Retained Earnings Account, Common Stock Account
Gains or Loss Accounts – Investment Income Account, Interest Expense Accounts, Asset Disposal Account
General Ledger Reconciliation
How does Technology help in maintaining a comprehensive General Ledger?
In the digital age, companies house Enterprise Resource Planning (ERP) Systems in their IT structure to keep track and control all corporate resources. These systems usually accommodate Accounting and Financial Management Software (FMS) to ensure that all your transactional finance data is recorded without any deviation. These modules allow companies to keep track of their General Ledgers by enabling a platform for the accounting team to manage virtual accounts to record data. These solutions can be programmed to be automated in repetitive instances like when generating descriptions in General Ledger, when computing GST, when balancing or creating new accounts and more. Here are some advantages that you can unlock in managing a computerised General Ledger by adopting a Finance Management Software.
- Allowing automatic reconciliation accounts in case of any negligence by the bookkeeper.
- Activate trigger systems in case there is a suspicious or erroneous transaction recorded.
- Multi-users can cross function collaboratively to manage the General Ledger and use it to make financial statements.
- It has complete integration with the existing systems of your company.
- It can house advanced financial analytical tools to address noteworthy financial considerations of your company comprehensively.
- The multi-dimensional platform promotes the visibility of your company’s financial spectrum.
- It enables agile tailoring of unique cash inflows and outflows.
- It houses smart tools to error-freely close financial books.
- If your company is a multinational business, you can use several currencies in a general ledger using a modern FMS.
- Concurrently track and report the financial health in compliant to multiple financial standards.
- Finally, it can house advanced security protocols to keep the sensitive financial data safe within corporate premises and when sharing.
Additionally, there is a modern technology that empowers you to maintain your General Ledger eventfully. Your company can use the Blockchain Technology to maintain a decentralised General Ledger. The Blockchain Technology enables outbound entities or any other users to distributively update the company General Ledger rather than being dependent on one centralised node. This technology transforms General Ledger to be a self-regulated system where each user can have access to a personal virtual copy of the General Ledger. The illustration below shows the convenience that all users would have in harnessing this technology to manage the General ledger regardless of where they are based. Therefore, this is a special consideration that you must ask your software vendors when you request them to cater to your FMS requirements. You have to make sure whether the General ledger is endowed with the advantages of the blockchain technology.
