The general ledger is an important accounting tool for any business. Typically set up in a two column format with a listing of accounts and the debits and credits to those accounts, it is used inside and outside of the firm to obtain a partial picture of a company’s financial condition.
The general ledger tracks account payments and receipts. In summary of the general journal’s chart of accounts, the general ledger offers a portrait of revenue such as income generated from sales and services and expenditures such as legal fees, wages and office expenses.
Department Expenditure Summaries
It allows immediate access to any account within the company’s financial tracking system. For example, if a marketing director needs to access year-to-date advertising expenditures, she can gather that information from a quick look to the general ledger.
Company's Paper Trail
If properly maintained and linked with its creating accounts, the general ledger is an important piece of a company’s paper trail. Since the general ledger is where account posting occur, information such as a transaction’s source, date, description and account balance is accessed through the general ledger. Looking at the general ledger should then allow a company officer to trace a transaction back to a purchase order, invoice or time sheet.
Adding subcategories, known as subledgers, to the general ledger gives financial officers further details, trends and patterns within the company and enables them to make sound financial decisions. Understanding the fluctuations of sales and expenditures within his company will assist a chief financial officer as he decides when and how to pursue contracts or make capital investments.
It creates an audit trail for all of the company’s financial transactions. In addition to being a valuable internal tool, the general ledger would also be accessed by external auditing agencies such as the IRS or SEC.
Financial Health of Company
As it derives its information from a company’s chart of accounts and check book transactions, the general ledger keeps track of assets, liabilities, equity, income and expenses.
The general ledger links within a company’s accounting system to generate a company’s most important financial statements: the Balance Sheet and the Profit and Loss Statement.
Documentation to Obtain Funding
The general ledger is one part of the necessary documentation needed for firms to obtain outside financing. It is also part of the annual reports issued to stock holders in publicly traded companies.
- accounts image by Alexey Klementiev from Fotolia.com