The system for keeping a company's financial records is a general ledger, with a trial balance used to confirm information about debit and credit accounts. It provides a record of each financial transaction that takes place over the duration of an operating firm's life and contains the account data necessary to produce the company's financial statements. Transaction data is segmented by type in the accounts for assets, liabilities, owners' equity, income, and expenses.
The general ledger serves as the foundation for the system used by accountants to organize and store the financial data required to create the company's financial statements. Transactions are posted to certain sub-ledger accounts in accordance with the company's chart of accounts.
The general ledger is then closed off or summarized, and the accountant creates a trial balance, which is a summary of the balance of each ledger account.
The trial balance is reviewed for inaccuracies, corrected by adding any extra entries that are required, and the corrected trial balance is utilized to produce the financial statements.
When a company adopts the double-entry bookkeeping method, every financial transaction has an impact on at least two sub-ledger accounts, and each entry involves at least one debit and one credit transaction. The total of all double-entry transactions, also known as "journal entries," must balance. Journal entries are displayed in two columns, with debit entries on the left and credit entries on the right.
Double-entry accounting is based on the following accounting equation:
Assets − Liabilities = Stockholders’ Equity
The general ledger's transaction information is gathered and condensed at different levels to create a trial balance, income statement, balance sheet, statement of cash flows, and numerous other financial reports. This makes it easier for stakeholders such as the company's management, analysts, investors, and accountants to continuously evaluate the performance of the business.
The financial statement data frequently does not provide the complete picture when expenses increase during a particular period or when a business makes other transactions that have an impact on its revenues, net income, or other important financial measures. When certain kinds of accounting mistakes occur, it becomes important to revisit the general ledger and examine the specifics of each recorded transaction in order to identify the problem. Reviewing dozens of journal entries may be necessary at times, but maintaining consistently accurate and reliable firm financial accounts is crucial.
Think about the scenario when a business is compensated $1,000 by a client for its services. The accountant would then add $1,000 to the asset column and take $1,000 from the accounts receivable column. Because only the asset side of the accounting equation is impacted by the corresponding growth and fall, the equation is still in balance.
- The double-entry accounting system of a business is built on the general ledger.
- All transaction information required to generate the income statement, balance sheet, and other financial reports is contained in general ledger accounts.
- Transactions recorded as journal entries to sub-ledger accounts are compiled into general ledger transactions.
- Every general ledger account and its balance are listed in the trial balance report, which makes it simpler to check adjustments and track out problems.