What Is General Ledger Accounting?

What is a general ledger?

A general ledger is a record of a company’s financial transactions. General ledger accounting summarizes and sorts a company’s financial information. Most businesses track this financial accounting data with accounting software.

“A general ledger is a master record that contains all the accounts used by a company or organization,” explained Max Avery, co-author of Wealth in Numbers and chief business development officer at Digital Family Office. “These accounts include assets, liabilities, equity, revenue and expenses.”

A general ledger includes the following: 

• Revenue: Revenue is the money earned from the sale of a company’s products or services. In accrual accounting, unlike cash accounting, companies must record revenue when it’s earned, not when it’s received.
• Expenses: Expenses are anything your business spends money on, including payroll, rent and marketing. A combination of fixed and variable expenses determines your business’s overall profitability.
• Assets: Business assets are anything of value your business owns. Asset ledgers typically have subaccounts. The larger the company, the more complex the asset ledger will be.
• Liabilities: An accounting liability is anything your company owes. The liability account is where your company records things like debt, customer prepayments and deferred income taxes.
• Equity: Equity is the owner’s interest in a company’s assets. Calculate your equity by subtracting your company’s liabilities from its assets.

Avery explained that a general ledger outlines all transactions and sorts them by type. “For instance, if a company purchases a new piece of equipment, that transaction will be recorded in the general ledger under the asset account for equipment,” Avery noted. “If the company takes out a loan, it will be recorded in the liability account.”

Companies use general ledger data to compile their financial statements and track business performance.

How is a general ledger used in accounting?

Businesses use general ledgers as part of the accounting process. Without a detailed general ledger, your accounting can quickly become disorganized and inaccurate. Inaccurate financial records cause significant problems down the road.

A general ledger provides the information necessary to create a balance sheet or cash flow statement and gives a quick overview of your organization’s financial health. A general ledger also creates a comprehensive audit trail, which will be helpful if you ever face a tax audit. 

“The general ledger is essentially the backbone of any accounting system,” explained Dana Ronald, president of the Tax Crisis Institute. “It’s where all the financial transactions of a business are compiled — think of it as the master file that records everything. Every expense, every sale and every transfer is logged in the general ledger, forming the basis for the business’s financial reports. It provides a clear, organized record that keeps you aware of your income, expenses, assets and liabilities.”

General ledger components

There are four primary components of a general ledger:

• Journal: The journal contains raw accounting entries, recorded sequentially by date.
• Description: Each transaction includes a brief description.
• Debit and credit columns: Every transaction in the general ledger is classified as either a debit or credit.
• Balance: The balance must be updated each time a new debit or credit is posted. This practice ensures financial records remain accurate and current.

Using a general ledger

To get started, create a journal and record each business transaction as it occurs. Ensure each transaction is assigned to the correct account. Once your journal is complete, transfer the data to the general ledger. 

A general ledger takes information from the journal and categorizes it into the appropriate accounts. Each entry may also include subaccounts to provide further transaction details.

For instance:

• If recording an asset, subaccounts may include savings, inventory or accounts receivable.
• If recording revenue, subaccounts could include product sales or miscellaneous income.

General ledgers and double-entry bookkeeping

Double-entry bookkeeping states that every financial transaction affects a company’s finances in two ways. The following equation summarizes this concept:

Liabilities + Equity = Assets

In a double-entry system, a company’s total assets must equal the sum of its liabilities and the owner’s equity. This ensures that the balance sheet stays balanced every time and that each debit has a corresponding credit.

“Double-entry bookkeeping is a system built for accuracy,” Ronald said. “Every transaction has at least two entries: a debit in one account and a credit in another, ensuring everything balances — what comes in equals what goes out. For example, buying business equipment means debiting the equipment account (asset) and crediting the cash account. This balance adds consistency and reliability to your financial records.”

The key principle of double-entry bookkeeping is that every transaction affects at least two accounts. For example:

• If a business takes out a $500,000 loan, that loan is recorded as a liability but also increases total assets.
• If a business purchases inventory, that inventory increases assets while reducing cash.

Double-entry bookkeeping ensures the business maintains accurate records with a corresponding relationship between each liability and asset.

What do general ledgers tell you?

General ledgers help generate financial statements for financial institutions or stakeholders. They can also help you understand and track your business’s finances. Here are a few ways they do this:

• General ledgers prepare a trial balance. Preparing a trial balance means adding debits and credits to ensure both columns match. This practice ensures your books are accurate and free from mathematical errors. Most companies prepare a trial balance at the end of each reporting period. “General ledgers are powerful tools for analysis,” Ronald noted. “They help you prepare a trial balance to ensure your debits and credits match. They offer a clear view of your business’s financial health — monitoring cash flow, spotting trends and identifying discrepancies.”
• General ledgers provide an overview of your business finances. A general ledger gives an overview of your business’s financial activity over a specific period. You can analyze financial trends over the past year or focus on a shorter period, such as the past 90 days. “It provides an overview of a business’s finances by showing the current balances of each account,” Avery explained. “This allows business owners and managers to see where their money is coming from and going, helping them make informed decisions about their operations.”
• General ledgers make it easier to spot problems. One of the most significant benefits of using a general ledger is that it becomes easier to spot financial problems in your business. For instance, if your expenses have been significantly higher over the past year, reviewing your general ledger can help you uncover the cause.

Example of a general ledger entry

A general ledger is used to record your business’s financial transactions. Here are some examples of common general ledger entries:

• Deposits to a checking or savings account
• Incoming revenue from product sales
• Recent inventory purchases
• Office supply orders
• Payroll checks
• Estimated quarterly state and federal tax payments
• Business insurance payments

Here is an example of what a general ledger entry would look like:

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Cash

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$1,000

As shown in this example, purchasing inventory impacts both the debit and credit columns. The inventory purchase increases assets (debit), while cash decreases (credit) to reflect the transaction.

How accounting software can help manage your general ledger

Most businesses use feature-rich accounting software to manage their general ledger efficiently. 

“Using accounting software to manage a general ledger boosts efficiency and accuracy,” Ronald noted. “It automates tasks, reduces errors and ensures compliance with standards. Advanced tools also generate real-time reports, perform analytics and integrate with other systems for smooth financial management.”

When choosing accounting software, ensure the solution supports general ledger accounting. Here are some excellent options:

• QuickBooks Online: QuickBooks Online is a popular all-in-one accounting solution that supports general ledger reports. The software also simplifies payroll automation, batch transactions and running trial balances. Read our QuickBooks Online review for more information about its features and pricing.
• FreshBooks: With FreshBooks, you can track revenue and expenses and create a trial balance to ensure everything adds up. The reports you generate may not be as detailed as with other software, but FreshBooks will create a basic general ledger report. Learn more in our FreshBooks review.
• Xero: Xero’s accounting software makes sending invoices, receiving payments and managing your cash flow easy. Xero lets you run multiple reports, including a general ledger report. You can create a general summary of your account’s activity and balances or run a General Ledger Detail Report, which shows each transaction within those accounts. Our detailed Xero review explains more about this solution’s functionality.

“Accounting software automates the double-entry bookkeeping process, making it easier and less time-consuming to record transactions,” Avery explained. “Accounting software also allows you to generate financial reports instantly, giving you a real-time view of your business’s financial performance. [Many] programs offer features such as budgeting and forecasting, helping you make strategic decisions based on your financial data.”

Amanda Clark contributed to this article.