General Ledger interview questions and answers
A general ledger is the foundation of a system employed by accountants to store and organize financial data used to create the firm's financial statements. Transactions are posted to individual sub-ledger accounts, as defined by the company's chart of accounts.
The transactions are then closed out or summarized to the general ledger, and the accountant generates a trial balance, which serves as a report of each ledger account’s balance. The trial balance is checked for errors and adjusted by posting additional necessary entries, and then the adjusted trial balance is used to generate the financial statements.
How a General Ledger Functions With Double-Entry Accounting
A general ledger is used by businesses that employ the double-entry bookkeeping method, which means that each financial transaction affects at least two sub-ledger accounts, and each entry has at least one debit and one credit transaction. Double-entry transactions, called “journal entries,” are posted in two columns, with debit entries on the left and credit entries on the right, and the total of all debit and credit entries must balance.2
The accounting equation, which underlies double-entry accounting, is as follows:
\text{Assets} - \text{Liabilities} = \text{Stockholders' Equity}Assets−Liabilities=Stockholders’ Equity
The balance sheet follows this format and shows information at a detailed account level. For example, the balance sheet shows several asset accounts, including cash and accounts receivable, in its short-term assets section.2
The double-entry accounting method works based on the accounting equation’s requirement that transactions posted to the accounts on the left of the equal sign in the formula must equal the total of transactions posted to the account (or accounts) on the right. Even if the equation is presented differently (such as Assets = Liabilities + Stockholders’ Equity), the balancing rule always applies.
What Does a General Ledger Tell You?
The transaction details contained in the general ledger are compiled and summarized at various levels to produce a trial balance, income statement, balance sheet, statement of cash flows, and many other financial reports. This helps accountants, company management, analysts, investors, and other stakeholders assess the company’s performance on an ongoing basis.
When expenses spike in a given period, or a company records other transactions that affect its revenues, net income, or other key financial metrics, the financial statement data often doesn’t tell the whole story. In the case of certain types of accounting errors, it becomes necessary to go back to the general ledger and dig into the detail of each recorded transaction to locate the issue. At times this can involve reviewing dozens of journal entries, but it is imperative to maintain reliably error-free and credible company financial statements.
A Balance Sheet Transaction Example
If a company receives payment from a client for a $200 invoice, for example, the company accountant increases the cash account with a $200 debit and completes the entry with a credit, or reduction, of $200 to accounts receivable. The posted debit and credit amounts are equal.