Accounting & General Ledger

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A general ledger, which contains all the accounts of a business, is the backbone of an accounting system. A general ledger documents and summarizes a high volume of financial transactions, creating order in a chaotic situation. Without a ledger, transactions can be easily lost, making accounting information unreliable and ineffective.

Significance

Accounting, the language of business, requires capturing lots of information and making sense of it. A firm can run all its financial information through a general ledger alone, although many businesses have sub-ledgers for accounts receivable and payable with detail information. The main function of a general ledger is to catalog and save accounting information, so that reports can be compiled easily and queries can be responded within a complete, centralized location. Assets, liabilities, revenues and expenses are recognized in separate accounts in the general ledger with transactions mixed up -- consistency is a must when dealing with accounting and general ledgers.

Accounts

A general ledger is populated by accounts, which are usually made up of numbers and short descriptions. For example, you could have a 100 Cash-Bank, a 101-Investment and a 600-Rent expense accounts. Each account has a beginning balance, a set of transactions and an ending balance. If you want to see all the accounts in a business, ask for a chart of accounts, which gives you a listing of all accounts with descriptions and types.

Journal Entries

A journal entry is the mechanism used in the double-entry method of accounting to modify account balances in the general ledger. Each transaction has two sides -- a debit and a credit. Journal entries follow this setup, requiring a debit and a credit that equal each other. For example, if you pay $200 for supply expense, you debit the expense account $200 and you credit cash for the same amount. With a computerized accounting system, many journal entries happen behind the scenes, modifying accounts and keeping the process accurate and efficient.

Reconciliations

Many businesses reconcile accounts in the general ledger to make sure their balances are correct. For example, a bank reconciliation, which proves cash balances, is a common monthly process. Accounts payable and receivable balances are reconciled with its sub-ledgers and inventory accounts are compared with inventory counts. PricewaterhouseCoopers LLP, a major accounting firm, has released an advisory publication, "How to improve account reconciliation activities*," that emphasizes the need for proper reconciliations to minimize risks of mistakes and misappropriations.

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