When it comes to business finances, using a double-entry system that makes use of both a general ledger and a general journal is the best method for checking overall statistics and keeping things running smoothly and profitably.
But to understand how a double-entry accounting system, or double-entry bookkeeping works, it is first necessary to understand the different functions associated with the general ledger and the general journal.
The General Ledger
The general ledger, also known as the book of second entry. It is used to track assets, liabilities, owner capital, revenues, and expenses. It is a book or file used to record all relevant accounts.
Each account is a two-columns in a T shaped table where the book taper typically places the account title at the top of the T while recording that debit entries on the left side and credit entries on the right.
Sometimes, you’ll find that the general ledger displays additional columns for particulars such as a description of the transaction, serial number, and date.
Transactions from general journals are posted in the general ledger accounts and then balances are calculated and transferred from the general ledger to a trial balance.
You also use it to create the chart of accounts, or the list of all the accounts used in the organization’s general ledger.
The act of recording a transaction in the ledger is called posting. The general ledger is known as a principle book.
The General Journal
The general journal Is the book of original entry where accountants and bookkeepers keep a record of business transactions, in order, according to the date the transactions occur, or in chronological order.
Recording a transaction in the general journal is called journalizing. It is known as a subsidiary book.
The general journal is the first location where information is recorded, and every page in the book features columns four days along with serial numbers and debit or credit records.
Some organizations may choose to keep specialized journals such as purchase journals or sales journals that are meant to record specific types of transactions.
Once you have recorded a transaction in a general journal, the amounts are posted to the appropriate accounts, such as equipment, accounts receivable, and cash transactions.
Thanks to advances in technology, most people do not need to maintain each book of accounts separately. However, despite advances in software technology, there always needs to be some record for non-routine transactions and general journals, such as bad debt, depreciation, and sale of any assets.
Which One Should You Use and When?
Today, the majority of organizations rely on software to record transactions in both general ledgers and general journals, which has dramatically streamlined the necessary record-keeping activities.
Most accounting software can maintain a central repository so you can log ledger and journal entries. With advances in technology, it is easier and less tedious to record transactions, and you no longer need to maintain each book of accounts separately.
The person entering data in any module of your company’s accounting or bookkeeping software may not even be aware of these repositories. In the majority of the software applications, your data entry staff only needs to click a drop-down menu to enter a transaction in a ledger or a journal.
In accounting and bookkeeping, you must use both and cannot get away with using one or the other. The journal is the first step of the accounting cycle because all transactions are analyzed and recorded as journal entries.
The ledger is an extension of the journal where journal entries are marked by the company and its general ledger account based on which of the financial statements the company has prepared.
Because accounting also creates the trial balance, income statement, and balance sheet from looking at the ledger. The ledger is just as important as the journal. The journal is often considered more important than the ledger because if it is done wrong, the ledger cannot be done correctly.
The ledger is dependent on the correctness of a journal. As long as the journal is recorded accurately, the ledger will follow.
Balancing is mandatory for the ledger but not required in the journal. In the journal, the narration is a necessary part of understanding the nature of the entry.
However, in the ledger, the narrative is optional. In the journal, the entry is recorded as per the date of the transaction, but in the ledger, the entry is recorded account wise.
Balancing is not required in the journal, but it’s mandatory in the ledger.
Both accounts payable and accounts receiveable need to keep a list of all the financial transactions they make – paying bills for the business and bringing in the capital for the company.
Keeping accurate accounting records for all money coming into and flowing out of the business is crucial when it comes to filing and paying taxes.
Small businesses must get in the habit of recording transactions regularly, so they always have an accurate representation of their financial information.
The general ledger provides the basis of many financial reports that can indicate how healthy an organization is.
Understanding how healthy the company is, helps investors, management, and other stakeholders to understand how the company is performing regularly, as well as provide insights on how specific changes have helped or hindered the company.
