What Is a General Ledger?

Guidance to the most basic accounting record all business uses.

Introduction

The general ledger is where a company keeps its financial records. It collects and organizes all account activity — assets, liabilities, equity, revenue and expenses — so you can understand the full financial picture. In basic terms, the general ledger shows what money was received where and for what purpose — and how each transaction will impact over time on the business in question.

General ledger definition

The general ledger definition at its most basic is: a comprehensive record of every transaction made, by account, for an organization. All accounts throughout the ledger have a running balance, noting all debits and credits posted to that account. Key Components of the General Ledger Financial Statements, Audit Trails, Decision-Making

Why the general ledger matters

The general ledger is vital because it: 1) aggregates transactions into categories in the form of accounts; 2) develops the foundation for financial statements like the balance sheet and income statement; and 3) ensures an audit trail both inside the organization as well as externally. Lack of an accurate general ledger leads to unreliable financial reporting and challenging reconciliation.

General ledger Inclusions

• Chart of accounts: the listing of accounts in the ledger, by type (assets, liabilities, equity, revenue and expenses).
• Ledger accounts: make entries into an account to account for journal entry items in the chart of accounts (chart of accounts: Cash, Accounts Receivable, Accounts Payable, Sales, Rent Expense…etc.).
• Journals: the transactions written down chronologically in journals prior to posting to accounts in ledgers.
• Trial balance — a report that lists all ledger account balances to ensure total debits equal total credits
• Posting: the procedure of applying journal entries to the general ledger accounts

How the general ledger works

• Stream of journal entries: Each financial impact activity of a business is doted down on first stage in a kind called journal entry. Each entry provides the accounts impacted, amounts debited and credited, dates, and a brief description.
• Posting Journal Entries: Posting refers to posting journal entries to the appropriate ledger account. Updates reflect cumulative activity — posting updates the running balance for every account so that ledger is always reflective of all activity to-date.
• Prepare a trial balance: At regular intervals, typically at the end of each month, the business prepares a trial balance to check that total debits equal total credits after posting.
• Prepare adjusting entries: Accruals, deferrals, depreciation and also correction of errors are adjusted to make sure that accounts are at a correct period.
• Close temporary accounts: Revenue and expense accounts are closed out to retained earnings or owner’s equity at the end of the accounting period, so that these temporary accounts start with a zero balance in the next period.
• Prepare financial statements: The adjusted balances in the ledgers are used to compile the income statement, balance sheet, and cash flow statement.

Double-entry accounting and the ledger

The general ledger follows the double-entry accounting system: every transaction impacts a minimum of two accounts, and total debits equal total credits. This system minimizes the risk of errors and ensures that the accounting equation, which states Assets = Liabilities + Equity, remains in balance. For instance, if a company has a cash sale, Cash (an asset) is increased with debit, and Sales Revenue is also increased with credit.

Examples of ledger entries

Cash sale = debit cash, credit sales revenue.

Buy on credit: Debit Inventory (or Expense); Credit Accounts Payable

Payment to a supplier: Debit Accounts Payable, Credit Cash.

Depreciation: DR. Depreciation Expense; CR. Accumulated Depreciation

All of these entries are posted into the relevant ledger accounts to keep the ongoing balances in line with current position.

Common ledger accounts with their functions

• Cash: tracks the inflow and outflow of cash balances.
• Accounts Receivable: money that customers owe.
• Accounts Payable: money owed to suppliers.
• Revenue/Sales: this is the income from operations.
• Expenses: logs costs associated in running the business like rent, utilities and wages.
• Equity: reflects owner’s investment and retained earnings.

Maintaining accuracy in the ledger

When done properly, ledgers provide a snapshot of an organization: transaction entries posted on time; periodic reconciliations between ledger accounts and source documents (bank statements, invoices, receipts); and review of trial balances. These reconciliations are useful for identifying unpaid entries, double postings or incorrect amounts.

Using a general ledger: Effective advice

• Maintaining a clear chart of accounts: A logical account structure enables us to post as well as report the Accounts effectively.
• Post often: Frequent posting keeps balances up-to-date and makes month-end close easier.
• Reconcile bank and customer accounts every month: Prevents surprises and catches problems early
• Maintain detailed descriptions: Good notes in each journal entry assist with audits and internal reviews.

Check the trial balance before finalizing statements: It’s the fastest way to identify posting errors.

Financial transparency and the general ledger

Trust and transparency with an infallible general ledger. Stakeholders—who own, manage, lend to and audit businesses—use information from ledgers to assess performance, solvency and compliance. Good accounting records also allow for better forecasting and budgeting.

Conclusion

That said, if you work in accounts or business management, knowing what a general ledger is and how it works is essential. The general ledger definition highlights its primary function as the master record of financial transactions. The general ledger can also be utilized as a powerful tool for reporting, decision making, and financial control once the business establishes a routine of regular posting, clear chart of accounts, and frequent reconciliations. Regardless if you are in the phase of preparing financial statements or simply reviewing a trial balance, the general ledger is your back bone to making sure that all transactions have been recorded along with their relevant categorizations and traceable.