This data from the trial balance is then used to create the company’s financial statements, such as its balance sheet, income statement, statement of cash flows, and other financial reports. Double-entry transactions, called “journal entries,” are posted in two columns, with debit entries on the left and credit entries on the right, and the total of all debit and credit entries must balance. A general ledger represents the record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance. It provides a record of each financial transaction that takes place during the life of an operating company and holds account information that is needed to prepare the company’s financial statements. Transaction data is segregated, by type, into accounts for assets, liabilities, owners’ equity, revenues, and expenses. To avoid unnecessary posting errors it is important to keep the number of ledger accounts to a minimum.

You can then investigate discrepancies and make corrections if necessary. Only the final three columns debit, credit, and balance include monetary amounts. For this reason the format shown is referred to as a 3 column general ledger. Therefore, various double effects of transactions in ledger accounts should be borne in mind.

1. In the past, the general ledger was literally a ledger—a large book where financial data was recorded by hand.
2. To maintain financial health, your total debit balances must equal your total credit balances.
3. Thereafter, relevant debit or credit amounts will be noted in the account’s ledger.
4. For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online.
5. The only difference is that the balance is ascertained after each entry and is written in the debit or credit column of the account.

What is posting?

The left-hand side is known as the debit side and the right-hand side is the credit side. From these permanent records, periodical statements are prepared to show the trading profit or loss made by the business and its assets and liabilities, at any given date. For example, if the business owner needs to know the total amount of purchases relating to a specific accounting period, it will be difficult to find this information in the journal. When you assign a code to each type of transaction, searching your ledger becomes much easier. For instance, when doing their own books, many business owners assign revenue sub-ledgers numbers starting at 100 and expense sub-ledgers codes starting at 200.

Controlling Accounts vs. Subsidiary ledger

Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. You should incorporate a GL into your business practices if you want up-to-date financial reports to secure small business loans, balance your books effectively, prepare for an audit, or accurately file your section 338 business sale taxes.

Self-balancing Format

Of course equity includes capital, revenue, expenses, gains, losses, drawings, and retained earnings, so the ledger must at least include GL account codes for each of these groups. Subsidiary ledgers include selective accounts unlike the all-encompassing general ledger. Sometimes subsidiary ledgers are used as an intermediate step before posting journals to the general ledger. Consider the following example where a company receives a $1,000 payment from a client for its services. The accountant would then increase the asset column by $1,000 and subtract $1,000 from accounts receivable.

General Ledger and Financial Statements

The method used for posting and balancing in a self-balancing ledger account is similar to that of the standard ledger account format. This is why this type of account is also called the periodical balance format of a ledger account. The bank statement style lends itself to modern accounting, but for the time being, double entry will be explained by the older traditional method.

Our team is ready to learn about your business and guide you to the right solution. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.