A general ledger is the backbone of an accounting system – it’s like the pizza dough to your pizza. The dictionary meaning says that “it’s a set of accounts and it’s numbered so that when you pull up a report, you can see the amount in that account for a particular time period or at a point in time”.
Enough with the dictionary definition that makes no sense, in essence…
It’s kind of like a hash tag search. So when you search for #family you get all the pictures and posts related to family.
Here’s a quick video (3:09) that explains what a general ledger is and how it works in a simple and easy to understand way:
In simple terms – it’s an organization system on steroids. Just like a wardrobe that’s organized in such a way where you can find anything.
So just like a wardrobe where you have space to store different categories of clothing, a general ledger has a listing of accounts that say what receipts or data that account will contain, e.g. sales.
Also, just like in a wardrobe, you can see how many jackets you may have, a general ledger takes this a step further and tells you how much has gone into an account, how much has gone out of an account and how much is left overall – this is called the balance.
So let’s take for example, a sales account. The general ledger will have a record of all the sales you have made, any refunds you’ve had to do, and further more, because it is dated, you’ll be able to make a query to see how many sales have been made during a certain time e.g. for the month of March.
This is such important information for a business.
The general ledger also contains all the information that gets pulled out when you want financial statements like your profit and loss.
So… you want a profit and loss report, you make a request on your accounting system and it will bring up all the accounts that are categorized as either revenue or expenses.
Likewise, when you want to pull up a report to see what you own and what you owe people - this is called a balance sheet, the system will pull up all accounts that have been classified as assets, liabilities or equity. I know there’s heaps of jargon here there and you can find out what all these weird words mean by checking out these blog posts about the meaning of assets, liabilities and equity.
A general ledger is just that, it means that accounts aren’t just without organization, it means that the accounts where you slot your information in are sorted into categories, are then further organized along the chain to appear in certain places only in your reports.
In essence, it’s about putting your accounts into a organization structure (just like a wardrobe) and that structure is called the general ledger.
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