General ledger codes are used to identify the debits and credits that pass through a firm's general accounts. Laws in many countries require business owners to keep records of business expenses on file for a number of years and the tax authorities can request copies of these files during audits. General ledger codes enable business owners and auditors to easily track different types of income and expenses.
Many companies separately track different kinds of expenses and details of these expenses are listed in accounting books known as sub-ledgers. Every sub-ledger has an identifying account code. Although separate accounts exist for different types of transactions, credits and debits often pass through the firm's main operating account and all of these charges are detailed in a journal or accounting document known as the general ledger. The general ledger codes are used to show which sub-ledger the funds passed into after clearing through the general account.
Accounting laws in some countries mean that general ledger accounts should have a zero balance at the close of business since these accounts are pass-through accounts and no debits or credits can permanently impact the balance of the general ledger account. The accountants or bookkeepers balance the general ledger by comparing all of the debits and credits that passed through the account on a particular day. If a debit was used to make a payment from the account then the accountant must offset that debit with a credit that was used to draw money out of the sub-ledger. On occasions, ledger tickets get misplaced or lost in which case the bookkeeper must audit the accounts to trace the error and then write new transfer tickets using the appropriate general ledger codes to rectify the problem.
In some nations, general ledger records include a list of the firm's non-cash assets such as property and account receivables as well as cash. Consequently, the account may not have a zero balance due to the value of these assets being factored into the equation. Nevertheless, transactions involving sub-ledger accounts should not impact the general account balance since these transactions should involve a debit and an offsetting credit.
Major firms often assign every departmental manager at least one general ledger code which can be used to trace expenses that a particular department incurs. Other general ledger codes are used by multiple divisions of a business because certain expenses are incurred by all departments such as codes for employee wages or paper supplies. Some firms impose tight controls on the sharing of general ledger codes to prevent unscrupulous employees using codes to misappropriate funds. Many firms require at least two employees to sign general ledger tickets and internal audits are regularly scheduled that are designed to prevent and detect fraud.