What is a General Ledger?

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Definition:

A general ledger is an accounting tool that companies use to track and summarize transactions — including purchases and sales — and to track accounts like cash, accounts receivable, and inventory.

🤔 Understanding general ledgers

A general ledger is the central repository of a company’s financial transactions and accounts. It keeps track of every dollar that a company spends and every dollar it brings in. It also tracks the movement of assets and debts within the company. The general ledger contains subledgers, like accounts receivable, accounts payable, cash, and inventory. Each of these subledgers includes information about the company’s assets and liabilities. General ledgers use the double-entry bookkeeping system, so every debit must have a corresponding credit and vice versa. This helps accountants determine whether a general ledger is balanced. If the sum of all listed assets, liabilities, and equity is zero, the ledger is balanced. Otherwise, there is an accounting error that the company must resolve.

Example

Suppose fictional Company XYZ wants to have a better understanding of its financial position, so it assembles a general ledger. Its general ledger shows information from different subledgers, cash, accounts receivable, accounts payable, inventory, investments, and fixed assets. Company XYZ’s accountants sum the assets, liabilities, and equity in the ledger to ensure its books are correctly balanced. If the books are balanced, Company XYZ can use the information in its general ledger to get a complete view of its financial situation.

Takeaway

A general ledger is like a college transcript…

A college transcript records all the classes a student takes and the grades the student earns. In the same way, a general ledger records every transaction a company makes, along with the value of each sale. When the company wants to examine its financial position, it can look at its general ledger just like a student looking at their transcript to determine scholarship eligibility or check their GPA.

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What is a general ledger?

A general ledger is the central record of a business’s financial information, including its account balances and cash inflows and outflows. The general ledger contains multiple accounts that track things like assets, liabilities, revenue, owners’ equity, expenses, and revenue. You can further divide each account into multiple subledgers covering things like cash or accounts payable.

The general ledger should hold all of the information a business needs to assess its financial situation.

General ledgers must always stay balanced. Every credit needs a debit offsetting it. Each asset must have a corresponding liability or equity balance. You can determine whether a general ledger is balanced by finding the sum of every asset, liability, and share of equity in the ledger. If the amounts are equal, the ledger is balanced.

What is the purpose of a general ledger and why do you need one?

The most basic purpose of a general ledger is to provide an overview of a business’s financial situation. By looking at a company’s general ledger, you can see its cash on hand, inventory, debts, and other assets and liabilities all in one place. It’s easy to get a quick idea of whether the company is financially stable or in danger of missing bill payments and needing to borrow money.

General ledgers also serve as a useful tool for accountants to make sure the company’s books are balanced. Accountants can use the general ledger to find a trial balance, summing the debits and credits in each ledger. If the general ledger’s debits and credits amount to $0, then the books are balanced. This can help make identifying fraud and filing taxes easier because all of the company’s records are in one place.

General ledgers also report real transactions rather than forecasted ones. This is important because it provides a more accurate view of the business’s finances than one based on expected sales.

What does a general ledger tell you?

A general ledger tells you the things that a business needs to know to produce financial statements such as balance sheets, cash flow statements, or income statements. If you want to know about a company’s sales, a general ledger can give you that information. If you need to know how much cash a business has in the bank, the ledger has that information, too.

The general ledger tells accountants, managers, and owners different things about the business. Accountants usually look to the ledger to make sure the company’s books are appropriately balanced. Managers will look at the ledger to find unusual changes in expenses or revenues and identify opportunities based on that. Owners can look at the ledger to learn about the business’s debts and its ability to meet its obligations.

What does a general ledger record?

A general ledger records all of a company’s accounts and the transactions that impact these accounts.

Typically, businesses break their general ledgers into multiple subledgers, recording separate assets, liabilities, and owners’ equity accounts. The companies then use journals to record individual transactions. For example, when a clothing store sells a pair of jeans, it makes a journal entry to record that transaction. The business posts journal entries to the general ledger regularly, adding them to the ledger’s records.

This means that the general ledger records both account balances and transaction data.

What’s the difference between a general ledger and a general journal?

A general journal typically tracks all the transactions that occur in a business. It records daily transactions such as sales to customers, purchases from suppliers, or investments from the business owners. A general ledger tracks a business’s financial accounts and the transactions that change them.

Entries made in the general journal usually have a short description to describe what happened. Regularly a company’s accountants or accounting software post transactions from the general journal to the general ledger. When they post transactions, the accountants assign the transactions to one of the accounts in the ledger.

For example, if a business sells $100 worth of tea leaves to a customer for cash, it makes a journal entry noting the following:

  • The date
  • The transaction details (in this case, a $100 credit to inventory and a $100 debit to cash)
  • A description (for example, “sold tea to a customer at store #137”)

When the accountant posts this transaction to the general ledger, they’ll note a $100 credit to the business’s inventory and a $100 debit to its cash account. Both general journals and general ledgers use the concept of double-entry accounting. Every debit must have an equal credit and vice versa.

Perhaps the most significant difference between the general ledger and general journal is how you group transactions. In a general journal, you typically enter transactions in chronological order. Start with the first transaction, then the second, then the third, in the order until the final transaction in the journal.

When posting the sales to the general ledger, you group them based on the accounts they affect. For example, you group all the transactions that affect the business’s cash account, regardless of when they occurred.

What is a chart of accounts?

A chart of accounts is the list of accounts that a company tracks in its general ledger. Every company is different, so each chart of accounts looks different.

Most businesses track accounts such as assets, liabilities, and owners’ equity, but the subaccounts within those accounts can vary. For example, a home-based business that doesn’t own any property probably won’t track a separate account for property, plants, and equipment.

Typically, the business’s accountants assign codes to each subaccount. For example, cash might have code 10000, accounts receivable 10001, inventory 10002, and so on. You can use the coding system to relate different accounts to each other. For example, if you have two cash accounts, one for covering payroll and the other for miscellaneous expenses, you might code them as 10010 and 10011.

Every transaction impacts two different accounts in the chart of accounts because every debit must have a corresponding credit, and every credit needs a related debit.

What is a Trial Balance?

At the end of an accounting period, usually each quarter or each year, a company’s accountants produce a trial balance based on the business’s general ledger. The trial balance helps show whether the business’s books are balanced, making it a valuable tool for finding mistakes in the company’s financial records. Auditors also usually request the trial balance report when they audit a business.

Even if a business runs a trial balance report and finds that the debits and credits in the report are equal, there may still be accounting errors present. The trial balance does not check for debits or credit assigned to the wrong account. That means that accountants must use other tools to look for errors in individual accounts.

A trial balance report contains the account number and name for each account in the business’ general ledger and its ending debit or credit balance. It doesn’t include any transaction information. For example, a simple trial balance report might look like:

Trial Balance
Cash$40,000
Inventory$15,000
Accounts Receivable$30,000
Debt($50,000)
Accounts Payable($15,000)
Other Expenses($20,000)
Total$0
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