GENERAL LEDGER

Introduction

The general ledger is a document which contains all of the individual accounts which are used to record the double entries of a business. It may have physical form as a book or it may be a software application.

All of the financial transactions of a business are entered into appropriate accounts in the general ledger. The balances on these individual accounts can be extracted as a trial balance as a step in preparing financial statements for the business.

Usually a business will organise its general ledger into the specific accounts which it uses. As part of this process, it might employ a coding system under which each individual ledger account is assigned a unique code.

The list of these codes is called a chart of accounts.

Chart of accounts

This is a list of accounts created by a business to be used to organise its financial transactions into identified categories of assets, liabilities, income and expenses.

Each general ledger account is identified by a unique code and heading. This allows a business to generate instructions and policies to be followed by those members of staff responsible for recording information.

The list is typically arranged in the order of the customary appearance of accounts in the financial statements, statement of financial position general ledger accounts followed by statement of comprehensive income general ledger accounts. The structure and headings in the list aim to result in consistent posting of transactions.

A company might have complete freedom in designing its chart of accounts (within the boundaries set by the rules of accounting). In some countries, the government might issue a generic chart of accounts from which a business selects those codes that are appropriate to its needs.

The aim of the chart is to ensure that all transactions are recognised in accordance with the requirements of the business.
 

Year-end exercise

The trial balance is a foundation for preparing a statement of comprehensive income and a statement of financial position at the end of an accounting period. The trial balance is extracted and various year-end adjustments are then made to the accounts after which a statement of comprehensive income and then a statement of financial position can be prepared, using these adjusted balances.

Any of these adjustments must also be recorded in the general ledger accounts so that these agree with balances on the financial statements.

At the end of the period there is another exercise to perform in order to prepare the general ledger for use in the next accounting period.

You may have noticed that profit is calculated after the trial balance has been extracted. This means that there is no profit figure in the general ledger. Rather, it is represented by all of the balances on the income and expense accounts.

These must all be transferred to a general ledger profit or loss account. The balance on this account will then be the profit or loss for the period. This balanced is transferred to the equity account.

Process:

Step 1: Perform double entry as necessary to capture the year-end adjustments in the general ledger accounts.

Step 2: Perform double entry to transfer all incomes statements amounts to a profit or loss general ledger account.

Step 3: Close off this account

Step 4: Transfer the balance on this account to capital.