Thursday, May 5, 2011

What is a General Ledger?

Accountants need to keep track of every transaction a business might make. In order to accomplish this, the accountant will develop a ledger.

The ledger consists of accounts. Each account represents something that a business needs to keep track of. Types of accounts include cash, debts, expenses or revenues. A good accounting system will contain accounts for every type of transaction a business needs.

An Example of a Simple General Ledger:

Accounts Receivable
Accounts Payable
Long term debt
Owners Capital
Salary expense
Rent expense

A larger business may have hundreds of different accounts if they are needed to keep track of a business.

The ledger will be used to record each transaction. If money comes into the business, cash increases. If money goes out, cash decreases. Cash can also be broken out into different pieces, and these accounts are added to the general ledger.

Cash- Checking account
Cash – Savings account
Cash – money market account

There can also be the same accounts with different banks.

Using Subsidiary Ledgers

As you can see, ledgers could become very cluttered for larger businesses, with many different accounts, particularly in different locations. Therefore, many companies use subsidiary ledgers.

These are similar in concept but focused on one topic. All the cash accounts above could be kept in one subsidiary ledger, and the total of the subsidiary cash accounts would equal one cash account on the general ledger.
The concept of subsidiary ledgers was very important when ledgers were kept by hand on paper. With computer systems, adding accounts to the general ledger is not as difficult, and space restricted. Still, subsidiary ledgers make it easier to balance the general ledger when financial statements are being produced.

A word of warning: always make sure the subsidiary ledgers balance to their corresponding accounts on the general ledger.

Once all the transactions are entered into the ledger, the accountant can use the information to create financial statements.

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