A general ledger is an accounting record that helps business owners keep track of their company’s financial transactions. The term general ledger originates from a different era of accounting—an era when accounting was done with physical books and paper. Nowadays, we use the same accounting terms, but most accounting is done using a computer and software.
The original general ledgers may have been recorded by hand instead of digitally, but we still follow a similar system. Let’s discuss the details of a general ledger.
What is a general ledger?
Each financial transaction for the business is recorded in the general ledger, and more detailed transaction information is recorded in separate records called subledgers.
Businesses that use double entry accounting use a general ledger. The double entry method refers to transactions recorded in both the debit and the credit columns. Each transaction consists of a journal entry that shows the accounts affected, the corresponding transaction amount, as well as a brief description of the transaction.
For each line of the journal entry, an amount appears in either the debit column or the credit column. The total of the debit column should equal the total of the credit column for each transaction. Here’s a quick example:
|Date||Account No.||Ref.||Account Name||Debit||Credit|
Components of a general ledger
General ledgers may be set up slightly differently, depending on the accounting system used. However, all general ledgers generally have a few common components:
- Journal Entry: This is the series of rows that describes each individual transaction. A journal entry typically includes:
- Date: The date column is the place to record the date for each transaction.
- Accounts affected: Often includes separate fields for the account number and the account name.
- Amount: This column shows the dollar amount that impacts each account.
- Description: An explanation for the transaction.
- Category or subledger: This column in the journal entry will reference the sub-ledger or category that the transaction fits in. Then, you can easily reference the subledger if you need more details about the transaction.
- Debit and credit columns: When recording journal entries, amounts in the debit column are on the left; amounts for the credit column are on the right. Where the amounts go depend on the type of account affected. An entry that increases an asset (e.g., cash, inventory, equipment) or expense (e.g., rent, utilities, employees’ wages) will be posted to the debit column; a decrease to an asset or expense will be posted to the credit column.
An entry that increases a liability (e.g., accounts payable, loans, wages payable) or equity (e.g., owner’s capital account) will be posted to the credit column while decreases are posted to the debit column.
- Balance: The general ledger keeps track of the account balance as each debit and credit is posted. Once every journal entry is posted for a relevant period of time (e.g., monthly), the ending balance can be calculated.
What is a subledger?
Sometimes called subsidiary ledgers, subledgers are more detailed accounts of the individual categories of expenses that are recorded in the general ledger. Every business has different subledgers depending on the nature of the business. The chart of accounts is a place where each account is named and the purpose of each subledger is recorded.
Each subledger has its own more detailed journal for recording every transaction in that category. The summary charges from each subledger will be recorded in the general ledger. If you need more details about a transaction listed in the general ledger, you can reference the corresponding subledger for more details.
While each business has a specific set of subledgers, some commonly used subledgers are accounts receivable, accounts payable, cash, and inventory.
Why do I need a general ledger?
Having a general ledger is essential for all businesses using double entry accounting in order to oversee all the financial activity of the business in one place.
A general ledger also gives you the ability to generate financial statements. While a general ledger shows you an overview of all your company’s transactions in one place, you may want a more high-level summary for various reasons. Understanding the different accounting reports and their purposes can be confusing, but here are a few common ones and their purposes:
- Chart of Accounts: This report is a supplement to the general ledger that serves as a key for all of the account names and purposes of the subledgers.
- Profit and Loss Statement (AKA an Income Statement): The Profit and Loss (P&L) summarizes the costs, expenses, and revenues of a company in a given period. This can be over a month, a quarter, or a year. The general ledger is helpful in generating the P&L.
- Balance Sheet: The balance sheet shows what you own (assets) versus what you owe (liabilities) and the difference (equity) in your company. you and your accounting team an overview of your business transactions, and it will help you keep track of any inconsistencies in your accounts.
When you notice things like an increase in expenses or drastic changes in your profit, you can reference the general ledger to determine why this might be. With all of your transactions listed in one place, you won’t have to comb through several different bills or statements to see where the changes came from.
How does a general ledger work?
A very simple example of a general ledger might look like this:
|Date||Account No.||Ref.||Account Name||Debit||Credit|
|To record cash sales for February 7, 2022|
|To record credit sales for February 7, 2022|
|To record cash purchase of inventory|
|2/15/22||5500||Exp||Wages & salaries||1,200.00|
|To record payment of wages & salaries|
In the above example, there are four types journal entries made to a general ledger:
- Recording cash sales: The recording of cash sales requires a debit to the cash account (an increase) and credit to sales (aka revenue) account (also an increase).
- Recording credit sales: The recording of credit sales involves a debit to accounts receivable and a credit to sales (both increases)
- Recording a cash purchase of inventory: The cash purchase of inventory; debit to inventory (increase) and credit to cash (decrease).
- Recording the cash payment of wages and salaries: Cash payment of employees’ wages and salaries is a debit to the wages and salaries expense account (an increase) and a credit to cash (a decrease).
Where do I record a general ledger?
While a general ledger can theoretically still be a book, most business owners find it helpful to have a digital general ledger for more reliable recordkeeping.
The most basic general ledger can be made in a spreadsheet, but there are many accounting software programs available where you can create a more detailed general ledger that is easily integrated with other financial data and reports for your business. Research programs like Quickbooks, FreshBooks, or Wave to see what might be the right fit for your business accounting needs.
Business accounting takes precision and correct knowledge. If you are not sure how to get started, consult a professional bookkeeper or accountant. They can help you set up and maintain your business accounting, including your general ledger.
Business accounting can feel overwhelming, but with some research, practice, and perseverance we know you can get it done like a pro.