The GL balance (General Ledger balance) is the difference between the total debit and credit entries recorded in a general ledger account.
Essentially, it represents the net amount in a particular account at a specific point in time. This balance is crucial for financial reporting and analysis. A general ledger account tracks all financial transactions for a specific asset, liability, equity, revenue, or expense.
Here's a breakdown:
- Debits: Increase asset, expense, and dividend accounts, while decreasing liability, equity, and revenue accounts.
- Credits: Increase liability, equity, and revenue accounts, while decreasing asset, expense, and dividend accounts.
The GL balance is determined by subtracting the smaller total (either debits or credits) from the larger total. There are two possible outcomes:
-
Debit Balance: If the total debits exceed the total credits in an account, the account has a debit balance. This is common for asset and expense accounts.
-
Credit Balance: If the total credits exceed the total debits in an account, the account has a credit balance. This is common for liability, equity, and revenue accounts.
Example:
Imagine a cash account (an asset account):
- Total Debits (deposits): \$10,000
- Total Credits (withdrawals): \$6,000
The GL balance for the cash account would be a debit balance of \$4,000 (\$10,000 - \$6,000).
Importance of GL Balance:
- Financial Reporting: GL balances are the foundation for creating financial statements like the balance sheet and income statement.
- Auditing: Auditors rely on GL balances to verify the accuracy of a company's financial records.
- Decision-Making: Managers use GL balances to make informed decisions about resource allocation and business strategy.
In summary, the GL balance provides a snapshot of the financial standing of a particular account, crucial for understanding a company's overall financial health.
