Basic accounting covers a lot of different topics starting from recording business transactions and continuing with preparation of the financial statements. The essential part of this accounting learning stage is understanding of the General Ledger concept, which is presented in this article together with the practical example.
Essence Of General Ledger
There are different journals, ledgers, subsidiary ledgers, other documents and forms used in the accounting to record business transactions, to categorize the accounting data and prepare financial statements. Principal ledger containing a list of all Balance Sheet and Income Statement accounts and their balances at the end of the accounting period is called General Ledger. It is used:
- to categorize the accounting data grouping it into separate categories, which are then used to prepare financial statements
- to summarize and include into appropriate categories business transactions (at first they are recorded in the General Journal) and impact of these transactions on the financial position of the business.
Such categorization is necessary since it is not possible to present all the business transactions in the financial statements, therefore accounts are used to group this data in accordance with certain criteria and then present it in Balance Sheet and Income Statement accordingly.
So General Ledger contains accounts, which usually have opening and closing balances, Debit and Credit sides to enter impact of business transactions. Income Statement accounts have zero opening and closing balances, since they are used only to account for data related to the particular accounting period.
Transfer of data from General Journal to General Ledger is called posting.
Below practical example demonstrates how General Ledger is used.
1. First, transaction is posted to the General Journal:
2. Second, data related to the transaction is posted to the appropriate General Ledger accounts, i.e. Cash and Share Capital.
Cash account is Debited in the same way as it is done in the General Journal. Reference number is given which is a number of the transaction.
Share Capital account is credited in the same way as it is done in the General Journal. Reference number is a number of transaction.