If you run a business and manage your accounting properly, then you may know the value of transaction records and financial statements. It is a valuable thing to make any financial decisions, tax planning, and ensure compliance. There, we maintain multiple records for different clients’ transactions, and managing these records is a challenging process. To solve this problem and access all the clients’ transactions, the general ledger was introduced to make accounting and bookkeeping easy. So here we are learn about the general ledger in accounting with its types, importance, and their working process in detail.
Definition of General Ledger
In accounting, the general ledger is an accounting ledger or a record of complete financial transactions of your business. A ledger account is created in the chart of accounts with multiple account types, such as income, assets, equity, liabilities, and expenses, according to the financial statement, and the combination of these accounts is called the general ledger. It provides a centralized repository to record all the business financial activities and organize all the transactions in different types of ledger accounts, and simplifies the accounting management process.
Importance of General Ledger in Accounting
A general ledger is an important financial record in accounting, which helps accountants to manage complex transactions. Basically, general ledger accounting provide its multiple types of accounts to properly organize the financial data, and this data helps to make a distinction between your business and legal or financial issues. So here we are give you the list where you can understand the importance of the general ledger in accounting.
- Track each financial transaction in the proper way.
- Make a balance sheet, an income statement, and a cash flow statement easily.
- Maintains an accurate record for each financial transaction.
- Ensures compliance and eliminate ligal financial issues.
- Make a strategic decision and plan to become profitable.
- Helps accountants to make perfect financial reports and file taxes.
- Record business expense and revenue correctly.
- Reduce the accounting errors and keep all the financial data organized and accessible.
Components of a General Ledger
In accounting, the general ledger uses some components to structure, track, and report each and every financial transaction. Below, we are giving you the list of components of a general ledger in accounting with their responsibilities.
- Journal entry: It is a chronological record of financial transaction contains specific transaction information and its accurate entry date.
- Description: It contains detailed information about the journal entry and the individual transaction.
- Debit and credit columns: this is used to track and record whether a transaction is a debit or a credit and maintain the accounting equation balance.
- Running balance: It is the total available balance of the account after each transaction update.
Types of General Ledger Accounts
As you know, how difficult to manage thousands of individual clients’ transactions. To solve this problem and to make this process easier, the general ledger divides these transactions into their different categories of accounts. Here we are discussing these different general ledger accounts and understanding their role in each transaction management.
- Assets: It is a resource owned by the organization. That includes cash, short-term investments, prepaid expenses, accounts receivable, etc.
- Liabilities: it is the total financial obligations that your business owes to an individual or another company. These include wages, credit cards, bank loans, tax bills, utility bills, software subscriptions, etc.
- Revenue: it is the amount that your business earns by selling goods or services, or from investment dividends.
- Expenses: It is the operating cost of your organization. That includes subcontractor costs, advertising costs, networking costs, employee salaries, etc.
- Equity: It is the amount of your business income after subtracting total liabilities from total assets. That includes retained profits, capital stocks, owners’ investments, etc.
Working Process of the General Ledger in Accounting
The general ledger provides an important record of transactions organized by the double-entry bookkeeping method. there each transactions are impact debited or credited accounts. This method was executed according to the modern accounting principle and ensure the all debit amounts is same as all credit amounts by the following equation.
Assets = Liabilities + Shareholders’ Equity
Here, the Assets is the credited amount and the (Liabilities + Shareholders’ Equity) is the debited amount. This equation is an important part of the double-entry system, which ensures that the amounts of both the credit and debit parts are equal.
Avoid Common General Ledger Mistakes in Accounting
Accounting management is an important process that most of the time deals with very sensitive data of an organization. If you make a mistake in recording the transaction, then that can impact your financial health and minimize the value of your company. So to reduce these types of problems here, we provide a list or the way to avoid common errors and the best practices for maintain general ledger in accounting.
- To avoid data entry errors, try to use an automation tool to minimize manual entry.
- To avoid misclassifying transactions, try to use general ledger software or accounting software.
- Try to make a Schedule for regular reconciliations and try to use accounting software for automation.
- To track billable time accurately, try to use time-tracking software that can easily integrate with your accounting system.
- Monitor the general ledger regularly to ensure all the transactions are recorded accurately and on time.
Conclusion
In accounting, the general ledger helps to organize all the financial transactions into the different types of general ledger accounts and ensure the accuracy by creating an accurate summary of the financial statement. In this article, we define general ledger in accounting properly and provide its importance, components, and account categories in detail. We hope you understand the meaning of general ledger in accounting and its working process properly.