Financial Control - What Is A General Ledger?
A general ledger lists a company’s past transactions and is organised by a set of accounts that allow business users to keep track of financial transactions and prepare financial reports. Each debit and credit transaction that affects the accounts is contained in the general ledger. These accounts serve as a unique record, including detailed information about transactions, such as the date, description and amount.
Through accounting software, a general ledger can sort all the transaction information to generate the trial balance (to validate ledger accuracy and ensure debit and credit accounts are balanced) and financial statements.
General ledger account
A general ledger account lists transactions for a certain type of account. The accounts in the general ledger correspond to the income statement and balance sheet. The income statement is divided into income (cash, inventory, accounts receivable, etc.) and expense sections that include totals from the general ledger accounts.
Daily transactions and totals are recorded outside and posted in the general ledger. The totals are then entered into financial reports such as the balance sheet and record assets, liabilities and the income statement (revenues and expenses). The balance sheet or financial statement will report all of a company's assets, liabilities, equity at that moment and can be used to determine the amount of working capital.
Subsidiary Ledger, Control Account and Double-Entry Bookkeeping
A subsidiary ledger is maintained to document individual transactions. It is separate from a general ledger and provides an opportunity to monitor individual transactions of a particular control account. A control account records individual transactions within subsidiary ledgers during an accounting period. It is independent of the double-entry system as it only verifies the entry of the transactions in the subsidiary ledgers.
The double entry system is a bookkeeping method where business transactions are recorded in a minimum of two accounts with the debit and credit amounts equal to each other. Since a general ledger summarises all transactions through the double-entry bookkeeping method, assets and liabilities will always be in balance.
General ledgers can be very complicated, especially for larger companies, so subsidiary accounts ledgers are created to make the order or analysis of records more convenient. Every entry in the subsidiary ledger is summarised in one general ledger control account with the total of the accounts in the subsidiary ledger equal to the balance of the related control account. The balance sheet and income accounts are contained within the general ledger and represent a summary of transactions in a subsidiary ledger.
Link to Balance Sheet and Income Statement
The financial statements of a business include the balance sheet, income statement, cash flow statement and the statement of a company's equity and are central to accounting. The income statement reflects revenue, expenses, profits, losses and income for a specific period time period. It is a temporary account as the balance is closed at the end of the accounting year.
A general ledger records all the transactions that are affected by a company’s income statement and balance sheet. An increase in net income or loss will lead to a proportional change in the equity of a company. The link between the balance sheet and the income statement Is useful when verifying whether the amount of net income on the income statement is correct.