A general ledger (GL) is a set of numbered accounts a business uses to keep track of its financial transactions and to prepare financial reports. Each account is a unique record summarizing each type of asset, liability, equity, revenue and expense. A chart of accounts lists all of the accounts in the general ledger, which can number in the thousands for a large business.
General ledgers are typically used and accessed by accountants. Following the accounting equation, any debit added to one of the general ledger accounts will have a corresponding, equal credit in another account, and vice versa. Using a general ledger can help companies monitor finances, track transactions, compile and maintain information for important business-related reports, and help prevent accounting errors and fraud.
Why companies should use general ledgers
A general ledger can provide value to businesses in a few different ways. One important function of a general ledger is that it can help generate a number of important financial statements for various business stakeholders to base decisions off of. As a general ledger provides important accounting records for all of a business's financial transactions, this can help accountants spot any erroneous, fraudulent or unusual transactions.
Furthermore, a general ledger helps compile a trial balance and help businesses proactively stay on top of expenses. A company may opt to store their general ledger using blockchain technology, which can prevent fraudulent accounting transactions and preserve the ledger's data integrity.
How does a general ledger work?
The general ledger essentially functions as a collective summary of transactions posted to subsidiary ledger accounts such as cash, accounts payable, accounts receivable and inventory. General ledgers work using a double-entry accounting method -- meaning that expenses and income items are shown as debits, credits, and dollar amounts. Each general ledger item or entry can be divided up into four main parts -- a journal entry describing the item number of the transaction posted to the account, a description for the specific transaction, a debit or credit value for the net balance change and a resulting balance after the credit or debit is posted.
During the bookkeeping process, other records outside the general ledger, called journals or daybooks, are used for the daily recording of transactions. These transactions can include cash payments toward an invoice and their totals, which are posted in corresponding accounts in the general ledger. In accounting software, the transactions will instead typically be recorded in subledgers or modules.
The totals calculated in the general ledger are then entered in other key financial reports, notably the balance sheet -- sometimes called the statement of financial position. The balance sheet records assets and liabilities, as well as the income statement, which shows revenues and expenses.
Income statements are considered temporary accounts and are closed at the end of the accounting year. Their net balances, positive or negative, are added to the equity portion of the balance sheet -- for example, owners' or shareholders' equity in a private company, or retained earnings in a nonprofit organization and figures that are derived by subtracting liabilities from assets. In contrast, the accounts that feed into the balance sheet are permanent accounts used to track the ongoing financial health of the business.
General ledger accounts are not budget accounts. Instead, they show actual amounts spent or received and not merely projected in a budget.
Types of general ledger accounts
Broadly, the general ledger contains accounts that correspond to the income statement and balance sheet for which they are destined.
The income part of the income statement might include totals from general ledger accounts for cash, inventory and accounts receivable -- money owed to the business. They are sometimes broken down into departments such as sales and service and related expenses. The expense side of the income statement might be based on GL accounts for interest expenses and advertising expenses.
Other GL accounts summarize transactions for asset categories, such as plant and equipment, and liabilities, such as accounts payable, notes or loans.
Other types of GL accounts
While the above accounts appear in every general ledger, other accounts may be used to track special categories, perform useful calculations or summarize groups of accounts. The latter type is called a control account.
For example, an accountant might use a T-account -- named so because of its T shape -- to track just the debits and credits in a particular general ledger account.
General ledgers and double-entry bookkeeping
Following the rules of double-entry bookkeeping, each entry in the general ledger must appear in two places: once as a debit and once as a corresponding credit. And the two added together must equal zero.
The terms debit and credit do not have their commonplace meanings, and whether each adds to or subtracts from an account's total depends on the type of account. For example, debiting an income account causes it to increase, while the same action on an expense account results in a decrease.
General ledger reconciliation
At the end of each accounting period, a trial balance is calculated by listing all of the debit and credit accounts and their totals, and separating those with debit balances from the ones with credit balances. The debit and credit accounts are then totaled to verify that the two are equal. If they aren't, the accountant can look for errors in the accounts and journals.
However, the trial balance cannot serve as proof that the other records are free of errors. For example, if journal entries for a debit and its corresponding credit were never recorded, the totals in the trial balance would still match.
Companies use a general ledger reconciliation process to find and correct such errors in the accounting records.
General ledger accounting software
For centuries, general ledgers were kept on paper, but in recent decades they have typically been automated in enterprise accounting software and in ERP, which integrates core accounting functions with modules for managing related business processes. Processes could include order management and human resource management. GLs are also a component in enterprise asset management software.
In such systems, the GL serves as a central repository for the accounting data.
General ledger transaction example
Here is an example of an accounting transaction within a general ledger for a fictional account, ABCDEFGH Software. Note that this specific example refers to ABCDEFGH Software's cash account.
On the leftmost category, note the date of the transaction. To its right, there will be a journal entry associated with the transaction, which contains an identifying number associated with the transaction. The description of the transaction is in the column directly to the right of the journal entry, and states the reason behind the transaction for reference. In this scenario, the transaction is for a cash payment from a client account to ABCDEFGH Software. Since the cash account is receiving income, then the debit column will show an increase and display a sum for the amount. In this case, it is $10,000.
For this transaction, the credit column will remain unchanged for this specific account; however, a separate ledger for the company's accounts receivable will reflect a credit reduction for the same amount, since ABCDEFGH Software no longer has that amount receivable from their client. Thus, maintaining the accounting equation's net-zero difference, one asset account will increase while another receives an equal decrease. The new balance for the cash account, after the net change from the transaction, will then be reflected in the balance category.