Basics of Accounting: General Ledger and Account Types

This is the first in a series of articles designed to help the more technical people understand the business. They are intended as general reference material.

The general ledger (GL) is the repository and reporting vehicle for all financial subledger transactions. Subledgers include the Oracle Applications modules such as: Accounts Payable (AP), Accounts Receivable (AR), Order Management (OE), Human Resources (HR), Inventory (INV), etc.

A general ledger stores a transaction as either a debit or a credit. Debits and credits perform different functions depending on the account types of the different transactions. There are five account types that are set up in Oracle Applications for the natural account segment of the accounting flexfield:

Asset: Assets are things of value used by a business and its operations and are usually classified as either tangible (cash, receivables, land, etc.) or intangible (patents, copyrights, and other nonphysical rights). A debit increases assets, while a credit decreases assets.

Liability: Liabilities are existing debts and obligations such a wages payable, mortgage taxes payable, and real estate taxes payable. Such obligations are generally termed accounts payable. A debit decreases liabilities, while a credit increases liabilities.

Revenue: Revenues are cash or other asset inflows to the business. However, revenues may take the form of a decrease in a liability as well as the increase in an asset. Sales, services, and royalties are examples of common forms of revenue. A debit decreases revenue, while a credit increases revenue.

Expense: Expense is the cost of assets consumed or services used in the process of earning revenue, and they can represent actual or expected outflows. Common expense accounts include wages, rent, and interest expense. A debit increase expenses, while a credit increases expenses.

Owner’s Equity: Owner’s equity is equal to total assets minus total liabilities. When an investment is made in a business, capital and owner’s equity are increased. If an owner withdraws money from a business, total owner’s equity is decreased. A debit decreases owner’s equity, while a credit increases owner’s equity.

Want to share this article? Download this article (PDF)