General Ledger Accounts: What it is & Classifications of General Ledger Accounts?

General Ledger Account


What is General Ledger Account?

A General Ledger Account summarise for the financial records used within an organisation. It is characteristically a thorough detail of all account activities of a business during a definite period. A general ledger work for numerous business activities such as:

  1. Enable a business to track any unnecessary spending

  2. It provides a comprehensive and exact record of all financial activities of a business

  3. Assists a business in identifying any theft, and enables it to take corrective action

  4. Provides comprehensive records for cross-referencing alongside other financial reports

It is imperative to record transactions in a general ledger as it enables a business to track all outgoing and incoming cash flow, and gain a better understanding of the financial health of an organisation. Below mentioned are the major categories of general ledger accounts an individual might come across:

  1. Assets (Accounts receivable, Cash, Fixed assets such as equipment, land etc.)

  2. Liabilities (Accounts payable, Bonds payable, Loans Payable, Long-term debt, Short-term debt)

  3. Non-operating losses and expenses (Loss incurred on disposal of equipment, Interest expense)

  4. Non-operating gains and revenues (Gain on disposal of company vehicle, Investment income)

  5. Operating expenses (Depreciation expense, rent expense, salary and wages expense)

  6. Operating revenues (Service fees, revenue from sales)

  7. Shareholders' equity (Common stock, Retained profits)

General Ledger Account

A general ledger has a classic layout that is used by most organisations in their accounting records, and comprises of two sections:

  1. All debit transactions are listed on the left side

  2. All credit transactions are listed on the right side

A general ledger is a set of accounts that back the main categories (assets, equity, and liabilities) which are recorded in the chief financial reports such as the P&L. These items are generated by posting transactions in the cash book, general journals book, purchases book, sales book. A general ledger is an essential document for any business; hence, it is imperative to know how it works. A general ledger builds a foundation for all of the financial reports for any organisation and can assist in understanding the financial working of an organisation. Let’s understand it better with an example:

Transaction

3 December 2018: Reinvesting cash equivalent to £80,000 and furniture equivalent to £20,000
5 December 2018: Account sales of £12,000 and cash sales of £10,000
6 December 2018: Goods purchased for Ingram and Co. worth £60,000; cash payment
equivalent to £15,000 cash and the remaining amount payable within 30 days
9 December 2018: Purchased equipment for office use from Byrd and Co. worth £99,000; cash
payment of £19,000 and the remaining amount to be paid in four instalments
20 December 2018: Credit customer returned goods worth £12,000
28 December 2018: First instalment payment of £20,000 made to Byrd and Co

Standard Ledger Accounts

Account #1Cash Account

Date Description Amount (£) Date Description Amount (£)
3 December 2018 Owner Equity 80,000 6 December 2018 Purchases 15,000
5 December 2018 Sales 10,000 9 December 2018 Office Equipment 19,000
      28 December 2018 Account Payable 20,000
           
        Balance c/d 36,000
Total 90,000 Total 90,000
1 January 2019 Balance b/d 36,000      

Account #2Furniture Account

Date Description Amount (£) Date Description Amount (£)
3 December 2018 Owner Equity 20,000      
     
     
           
        Balance c/d 20,000
Total 20,000 Total 20,000
1 January 2019 Balance b/d 20,000      

Account #3Owner’s Equity Account

Date Description Amount (£) Date Description Amount (£)
3 December 2018 Cash 80,000
3 December 2018 Furniture 20,000
     
           
  Balance c/d 100,000  
Total 100,000 Total 100,000
1 January 2019 Balance b/d 100,000

Account #4Account Receivable

Date Description Amount (£) Date Description Amount (£)
5 December 2018 Sales 12,000 20 December 2018 Sales return 12,000
     
           
Total 12,000 Total 12,000
     

Account #5Sales Account

Date Description Amount (£) Date Description Amount (£)
5 December 2018 Cash 10,000
      5 December 2018 Account Receivable 12,000
           
           
    Balance c/d   22,000      
Total 22,000 Total 22,000
      1 January 2019 Balance b/d 22,000

Account #6Purchase Account

Date Description Amount (£) Date Description Amount (£)
5 December 2018 Cash 15,000
6 December 2018 Note Payable 45,000
           
           
          Balance c/d   60,000
Total 60,000 Total 60,000
1 January 2019 Balance b/d 60,000

Account #7Note Payable Account

Date Description Amount (£) Date Description Amount (£)
6 December 2018 Purchases 45,000
           
           
           
  Balance c/d 45,000      
Total 45,000 Total 45,000
1 January 2019 Balance b/d 45,000 1 January 2019 Balance b/d 45,000

Account #8Office Equipment Account

Date Description Amount (£) Date Description Amount (£)
9 December 2018 Cash 19,000
9 December 2018 Account Payable 80,000      
           
           
    Balance c/d 99,000
Total 99,000 Total 99,000
1 January 2019 Balance b/d 99,000

Account #9 Account Payable

Date Description Amount (£) Date Description Amount (£)
28 December 2018 Cash 20,000 9 December 2018 Office Equipment 80,000
     
           
           
  Balance c/d 60,000  
Total 80,000 Total 80,000
1 January 2019 Balance b/d 60,000

Account #10 Sales Return Account

Date Description Amount (£) Date Description Amount (£)
28 December 2018 Account Receivable 12,000
     
           
           
    Balance c/d 12,000
Total 12,000 Total 12,000
1 January 2019 Balance b/d 12,000

Balance Sheet Accounts

A balance sheet is one of the financial statements that provide information about Equity, liabilities, and assets of an organisation at any given point of time. A balance sheet replicates an accounting equation i.e. Assets = Liabilities + Equity. Assets are the possessions managed by an organisation, liabilities are debts of business parties apart from owners, and equity is the obligation of an organisation to its owner. A balance sheet lists all possessions held by an organisation and demonstrations that it is equivalent to the total of equity balance and liabilities

Balance sheet accounts are associated with capital, liabilities, and assets. Examples of balance sheet accounts include accumulated depreciation, accounts receivable, accounts payable, cash, drawings, fixed assets, investments, paid-in capital, and retained earnings etc. Balance sheet accounts are labelled as everlasting accounts since these accounts are not closed at the end of an accounting year rather the year-end outstanding’s are carried ahead to turn into starting balances for the subsequent accounting year. Although most balance sheet accounts are similar for all businesses, certain accounts are determined by the nature of business. For instance, a production unit or a business trading goods will have an ‘Inventory accounts’, however, the same will not be obligatory for businesses providing services. An ‘inventory account’ can further be categorised into – opening stock, closing stock, work-in-progress, finished goods etc. Below mentioned are certain examples of Balance Sheet Accounts:

Assets Amount (in £) Liabilities Amount (in £)
Cash at Bank xxxxx Bills Payable xxxxx
Cash in Hand xxxxx Capital xxxxx
Furniture xxxxx Loans xxxxx
Land & Building xxxxx Outstanding Expenses xxxxx
Misc. Investments xxxxx Reserves & Surplus xxxxx
Plant & Machinery xxxxx Trade Creditors xxxxx
Stock xxxxx
Sundry Debtors xxxxx
Total xxxxx Total xxxxx
  1. Fixed assets such as equipment, plant, property, and vehicles

  2. Current assets such as accounts receivable (debtors), cash, inventory

  3. Liabilities such as accounts payable (creditors), deposits, loans payable, provisions, tax payable – financial resources owned by external entities

  4. Shareholder’s equity such as paid-in capital, reserves, retained earnings – financial resources owned by an organisation.

Income Statement Accounts

  1. Income statement, also referred to as P&L (Profit & Loss) account, is a document providing information on expenses, income, and the resulting earnings or loss made by a business during a given accounting period. Income statement accounts are records in P&L statement of an organisation and the most frequently used accounts are mentioned below:

  2. Revenue– Earnings from sale of services and products. For a global organisation, can be separated out into supplementary accounts for particular region, products, or other categorisations etc.

  3. Sales Discounts – Discount offered to clients from the gross transaction price

  4. Cost of goods sold (COGS) – Cost of factory-made goods sold – can be further split into costs of direct materials, factory overhead and direct labor

  5. Other expenses such as compensation expense, depreciation and amortisation expense, employee benefits, insurance expense, marketing expenses, office supplies expense, payroll taxes, professional fees, rent expense, maintenance and repair expense

  6. Taxes – Income tax, property tax etc. charged by local governments

  7. Travel and entertainment expense – Income tax, property tax etc. charged by local governments

  8. Utilities expense- Cost of electricity, gas, telephone connection

Income Statement for XYZ Co.
  2018 2017
Value in £ Value in £
     
Revenue 100,000 80,000
Cost of Sales (65,000) (55,000)
     
Gross Profit 35,000 25,000
     
Other Income 27,000 22,000
Distribution Cost (8,000) (5,000)
Administrative Expenses (12,000) (10,000)
Other Expenses (2,000) (1,000)
Finance Charges (1,000) (1,000)
     
  4,000 5,000
Profit before tax 31,000 20,000
     
Income tax @30% per annum (9,300) (6,000)
     
Net Profit 21,700 14,000

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