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 information with accounting software.

A general ledger outlines all transactions and sorts them by type. Companies use general ledger data to compile their financial statements.

A general ledger includes the following information:

• Revenue: Revenue is the cash 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 profitability.
• Assets: Business assets are anything of value your business owns. Asset ledgers typically have sub-accounts. 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.

How is a general ledger used in accounting?

There are four primary components of a general ledger:

• Journal: The journal contains raw accounting entries, recorded sequentially by date.
• Description: Each transaction will include a brief description.
• Debit and credit columns: Every transaction in the general ledger will be labeled as either a debit or credit.
• Balance: Each time a new debit or credit is posted to the account, you’ll need to update the balance. This practice ensures your business’s financial records are up to date.

To get started, create a journal and record each business transaction as it occurs. Ensure each transaction is recorded with the correct account. Once your journal is completed, you’ll transfer this information to the general ledger. 

A general ledger takes the information from a journal and categorizes it into the correct accounts. Each entry will also include sub-accounts, which break down the transaction even further.

For instance, if you were recording an asset, the sub-accounts might include savings, inventory or accounts receivable. Revenue sub-accounts could consist of product sales or miscellaneous income earned. 

General ledgers and double-entry bookkeeping

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

Liabilities + Equity = Assets

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

The critical thing to remember about double-entry bookkeeping is that every transaction affects at least two accounts. For example, let’s say a business takes out a loan for $500,000. That loan is considered a liability, but it also contributes to the company’s total assets. Or, if a business purchases inventory, that inventory raises its assets while also taking away from its cash. 

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

How do businesses use general ledgers?

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. It also gives you a quick overview of your organization’s financial health. A general ledger creates a comprehensive audit trail, which will be helpful if you ever get audited by the IRS.

What do general ledgers tell you?

General ledgers help you generate financial statements for financial institutions or stakeholders. They can also help you better 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 have no mathematical errors. Most companies prepare a trial balance at the end of each reporting period.

General ledgers provide an overview of your business finances.

A general ledger gives an overview of your business’s financial activity. It allows you to look more closely at your finances over a specific period. For example, you can review your financial activity over the past year or shorten the time frame to the past 90 days. 

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 why.

Example of a general ledger entry

Use a general ledger to record your business’s financial transactions. Here are some examples of what that would look like:

• 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:

As you can see in this example, the inventory purchased affects both the debit and the credit columns.

How accounting software can help manage your general ledger

Most businesses use feature-rich accounting software to manage a general ledger. However, not all accounting software will let you produce a general ledger report. Here are some excellent accounting software options that support general ledger accounting:

• QuickBooks Online: QuickBooks is a popular all-in-one bookkeeping solution that supports general ledger reports. The software also makes automating payroll and batch transactions and running trial balances easy. 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 allows you to 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.