What is a general ledger


What is a general ledger? The general ledger is the backbone of any
accounting system which holds financial data for an organization. Until the 1970s and 1980s, recording entries manually in big ledger books, was the way to go! You would have separate subledger books, such
as payroll, cash, inventory, receivables, and many others depending on the type of company. From each of these subledger books, summary
amounts would be transferred manually into a central place called the general ledger. As you can imagine, due to the manual nature
of the process, this process is prone to errors like writing 51 instead of 15. Today’s enterprise resource planning systems are a lot less manual, and the closing cycle tends to be a lot faster, but the general idea of subledgers and general ledger is still the same. For example, in an ERP system like SAP, original
documents are registered in the accounts receivable subledger by customer account, and in the
accounts payable subledger by vendor account. The amounts posted in the subledger are then
transferred from the subledger to accounts in the general ledger. Subledgers generally hold a lot more detail
than the general ledger. Compared to the manual process of recording
entries, computerized systems have the advantage of validation rules that can prevent a user
from posting if a journal entry is not balanced. This can save a lot of time “downstream”
in the accounting process. Here’s how that process works all the way
from recording individual transactions to preparing financial statements. Transactions based on source documents are
recorded in the appropriate subledger (payroll, cash, inventory, receivables, payables, fixed
assets, etcetera). The subledger activity is then posted as debits
and credits to the appropriate accounts in the general ledger. The listing of the account names is called
the chart of accounts. Getting a transaction into the general ledger
can be done through a subledger, but also through a manual journal entry directly into
the general ledger. The extraction of account balances is called
a trial balance. The purpose of the trial balance is to ensure
that the value of all the debit value balances equal the total of all the credit value balances,
and that the individual balances per account or per group of accounts makes sense. If an error is found in the trial balance,
the finance team goes through a process to rectify errors. Some of these errors may be very easy to correct, others might take a substantial amount of analysis. Is there an error in the general ledger itself? Is there an error in how the data from the
subledger is posted in the general ledger? Or is there an error in how the data was recorded in the subledger, or any of the manual journal entries? Or in the source documents themselves? Find the error, and correct it. Once the trial balance is deemed accurate,
the next step in the process can be taken: preparing the financial statements (income
statement, balance sheet, cash flow statement). Using the financial statements, you can connect
the financial numbers to the operational reality, by calculating financial ratios and analyzing
the trends. The general ledger is the backbone of any
accounting system. It is the central repository for accounting
data transferred from all subledgers. Want to learn more about business, finance,
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YouTube channel! Thank you.

6 thoughts on “What is a general ledger”

  1. I'm a buyer for a supermarket company, just got off the phone from a pepper grower in Holland. Then your video pop up!

  2. Enjoyed the video? Then subscribe to the channel, and watch my video on the history of accounting next: https://www.youtube.com/watch?v=HAL0sBd9oyg

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