What is a general ledger?

What is a general ledger?

A general ledger is an accounting system companies use to record, organize, and monitor all financial transactions. Also known as an accounting ledger, companies draw from this central repository to prepare reports like balance sheets, income statements, and cash flow statements, which give companies real-time glimpses into their financial health. 

Finance teams log company transactions into the general ledger, which all have either debits (money coming in) or corresponding credits (money going out). 

At the end of every reporting period (typically monthly, quarterly, or annually), companies use general ledgers to create a trial balance, which is a bookkeeping document compiling all debits and credits across different accounts. If the debits and credits equal out, your books are balanced. If not, you need to check for bookkeeping errors or potential misuse of company funds. 

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How does a general ledger work?

Accountants record individual transactions into the general ledger as “journal entries,” which include information about the type of transaction, associated accounts, and debit or credit amounts. General ledgers are often a composite of individual subledgers (e.g., accounts receivable or inventory), which help categorize expenses. 

A general ledger’s chart of accounts

Companies categorize transactions within a general ledger according to a chart of accounts, which is an index specifying how financial accounts and their reference numbers are organized. Categories specified within a chart of accounts often include assets, liabilities, equity, revenue, and expenses (more on these in a moment).  

Double-entry bookkeeping

General ledgers adhere to the double-entry accounting method, meaning that every transaction has two parts: a debit entry and an equal and opposite credit entry. 

Double-entry bookkeeping relies on the balance sheet equation, which is:

Assets = Liabilities + Equity

By counterbalancing incoming and outgoing funds, general ledgers can ensure this accounting equation always balances out. 

For instance, companies can log a $1,000 payment from a client by recording a $1,000 debit to the cash account of their general ledger and offset it by recording a $1,000 credit to accounts receivable. Since these are both asset accounts, the added $1,000 in one ledger entry and subtracted $1,000 in another balance the equation. 

The 5 core general ledger accounts

Most finance teams break down general ledgers into five main account types to categorize transactions.

• Assets: Resources businesses own, like cash, inventory, real estate, and accounts receivable 
• Liabilities: Debt businesses owe other parties, like loans, mortgages, credit card balances, and accounts payable
• Equity: The total value of ownership stakes in a business (i.e., the amount of money a company’s owners would get if assets were liquidated and debts were paid off)
• Revenue: Money coming into your business, like income from services rendered or subscription fees
• Expenses: Money your company spends during business operations, including payroll, employee purchases, and vendor bills

Keep in mind that these primary accounts often break down into subcategories (e.g., operating revenues and non-operating revenues; accrued liabilities and payroll liabilities). 

And remember: when you record these account types in a general ledger, you’ll have counterbalancing debits and credits. Debits increase assets and expenses and decrease liabilities, equity, and revenue. With credits, the opposite is true; they decrease assets and expenses and increase liabilities, equity, and revenue. 

Necessary information for a general ledger

While general ledgers vary in complexity, account types, and amount of subledgers, journal entries always need to include the following information: 

• Journal entry number
• Account name
• Date
• Description of the transaction
• Debit column
• Credit column
• Account balance

Why do companies use general ledgers?

An accurate, well-maintained general ledger helps companies manage spend, prepare in-depth financial reports, and plan budgets. 

Record transactions

As the centralized hub of all a company’s financial data, general ledgers help businesses track and reference any transaction. Companies get a transparent paper trail to assess spending and ensure all purchases and sales are accounted for. And since all the transactions are consolidated in one place, finance leaders don’t need to pore through scattered accounting records to make sure books tie out. 

Prepare accurate financial statements

General ledgers help produce income statements that gauge a company’s profitability, balance sheets that help businesses assess their financial position, and cash flow statements that track everything from operating expenses to financing rounds. 

A general ledger’s comprehensive record-keeping also prepares companies for potential audits. It even helps businesses monitor compliance with legal reporting requirements or industry-specific regulations. And since general ledgers comply with generally accepted accounting principles (GAAP), they can make it easier for businesses to stay organized for tax filings. 

Balance books

General ledgers help companies determine a trial balance. If debit and credit account columns don’t add up, accountants can flag and fix errors and catch fraud or noncompliant spending before the issue gets out of hand. 

Financial planning

General ledgers provide accounting data that informs strategic decision-making, like budgeting for product launches, managing employee spend, and headcount planning. Companies can use general ledgers to spot when revenues are down or why liabilities are on the rise and forecast with better accuracy. 

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Closing the books: The general ledger reconciliation process

In addition to recording every transaction in a general ledger, companies need to reconcile the accounts with supporting financial documents like bank statements, receipts, and invoices to close their books out every reporting period. This helps ensure accurate bookkeeping and protects against fraud. To reconcile account balances, finance teams should:

• Gather data: Assemble external financial documents and try to match them with their corresponding accounts and transaction details in the general ledger.
• Identify discrepancies: Flag missing transactions, unequal account values, and other bookkeeping errors like miscategorized subledgers.
• Investigate: Review documents and speak with relevant departments to determine the cause of any errors. 
• Adjust journal entries: Tweak journal entries in the general ledger when needed, providing documentation as supporting evidence. 
• Check work: Reassess the trial balance to see if credits and debits match up. 
• Build reports: Specify discrepancies, how they were addressed, new balance amounts, and share details with finance leaders.

It’s crucial to reconcile transactions regularly (typically monthly or quarterly) to weed out noncompliant spending and accounting errors. 

Automatically syncing employee expenses to your general ledger

While an accurate, well-maintained general ledger is crucial for business to control costs and plan ahead, manually logging every transaction on spreadsheets like Excel with double-entry bookkeeping and categorizing them within the right accounts takes time. It’s also error-prone, forcing a company’s accounting teams to catch and fix bookkeeping mistakes that throw trial balances askew.

To avoid the heavy administrative burden of combing through reams of financial documents to ensure books balance out, look for systems that sync with accounting software and automate the most time-consuming tasks associated with building and managing a general ledger. 

Frequently asked questions

What is a general ledger?

A general ledger is an accounting database companies use to record every financial transaction and build reports like income statements and cash flow statements. Finance teams use general ledgers to record credits and debits, which, according to the double-entry bookkeeping method, should offset 

Is a general ledger the same thing as a balance sheet?

No. A balance sheet is a snapshot of a company’s net worth—its assets, liabilities, and equity—at a specified point in time, while a general ledger is a master list of all company transactions, itemized by account type. Companies use general ledgers to produce balance sheets. 

What are the 5 elements of a general ledger?

The five foundational components of a general ledger are assets, liabilities, revenue, expenses, and owner's equity. 

What is a GL code?

Journal entries in a general ledger typically include a reference number to specify which accounts are being credited or debited. These reference numbers are typically known as GL codes, which make it easier to categorize transactions. 

What is a general journal?

General journals record raw business transactions in sequential order. General ledgers typically have more account categories than journals.

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