What Is a General Ledger?

Table of Contents

What Is a General Ledger?

Let me explain what a general ledger really is. It's the record-keeping system for your company's financial data, complete with debit and credit account records that get validated by a trial balance. This ledger records every financial transaction throughout your company's operations and holds the account information you need to prepare financial statements. You'll see transaction data segregated by type into accounts for assets, liabilities, owners' equity, revenues, and expenses.

Key Takeaways

You should know that the general ledger forms the foundation of your company's double-entry accounting system. Its accounts contain the transaction data required to produce an income statement, balance sheet, and other financial reports. Transactions in the general ledger summarize those made as journal entries to sub-ledger accounts. Finally, the trial balance lists every general ledger account and its balance, which makes checking adjustments and locating errors straightforward.

How a General Ledger Works

Here's how a general ledger operates in practice. It's the foundation of the system accountants use to store and organize financial data for creating your firm's financial statements. You post transactions to individual sub-ledger accounts as defined by your company's chart of accounts. Once that's done, you close out or summarize the transactions in the general ledger, and then generate a trial balance. This trial balance reports each ledger account's balance, gets checked for errors, adjusted with necessary entries, and finally used to produce the financial statements.

How a General Ledger Functions With Double-Entry Accounting

If your business uses double-entry bookkeeping, which most do, the general ledger is central to it. This means each financial transaction affects at least two sub-ledger accounts, with each entry having at least one debit and one credit. These double-entry transactions, or journal entries, go into two columns: debits on the left, credits on the right, and the totals must balance. The underlying accounting equation is Assets minus Liabilities equals Stockholders' Equity. Your balance sheet follows this format, showing detailed accounts like cash and accounts receivable in the short-term assets section. Remember, transactions on the left of the equation must equal those on the right, keeping everything balanced, no matter how you present the equation.

Simple Example of a Double-Entry General Ledger

Date: 01/03, Description: Purchase: Company X, Account: Inventory Debit $2,000, Account: A/P Credit $2,000
Date: 01/08, Description: Electricity payment, Account: Expenses Debit $300, Account: Cash Credit $300
Date: 01/15, Description: Employee payroll, Account: Salaries Debit $10,000, Account: Cash Credit $10,000
Date: 01/17, Description: Rent, Account: Rents Debit $3,000, Account: Cash Credit $3,000

What Does a General Ledger Tell You?

The general ledger's transaction details get compiled and summarized to produce a trial balance, income statement, balance sheet, statement of cash flows, and other reports. This allows you, as an accountant, manager, analyst, or investor, to assess the company's performance ongoing. Keep in mind that financial statements don't always tell the full story—expenses might spike or other transactions affect key metrics like revenues and net income. That's when you need to dive back into the general ledger to review journal entries and find the root cause. It might mean checking dozens of entries, but it's essential for error-free financial statements.

Tip for Investors

If you're an investor checking a company's accounting accuracy, review supporting documents beyond the financial statements, including footnotes.

A Balance Sheet Transaction Example

Take this example: if your company receives a $200 payment from a client on an invoice, you increase the cash account with a $200 debit and credit $200 to reduce accounts receivable. The debits and credits are equal, so one asset (cash) increases by $200 while another (accounts receivable) decreases by $200. The net effect is on the asset side only, keeping the accounting equation balanced.

An Income Statement Transaction Example

For the income statement, when your company gets payment for a product sale, that cash goes into net sales along with other receipts and minus returns. Subtract the cost of sales to get gross profit. Then account for other expenses like selling, general and administrative, depreciation, interest, and taxes. The difference between inflows and outflows is your net income for the period.

What Is the Purpose of a General Ledger?

In accounting, you use a general ledger to record your company's ongoing transactions, organized into assets, liabilities, revenues, expenses, and owner's equity. After closing sub-ledgers, prepare the trial balance, which you then use to create financial statements like the balance sheet, income statement, and statement of cash flows.

Is a General Ledger Part of the Double-Entry Bookkeeping Method?

Yes, if your company uses double-entry bookkeeping, it relies on the general ledger to store financial data. Each transaction impacts at least one debit and one credit, with totals balancing under the equation Assets minus Liabilities equals Stockholders' Equity.

What Is an Example of a General Ledger Entry?

Consider a $1,000 payment from a client for services: you increase the asset column by $1,000 and subtract $1,000 from accounts receivable. The equation stays balanced since the increase and decrease affect the asset side only.

The Bottom Line

A general ledger is your accounting tool for organizing and maintaining financial records. It underpins corporate financial statements, ensuring accurate and transparent reporting. You can use it to make informed financial decisions, while it provides investors and analysts with insights into your company's financial health.

What Is a General Ledger?

Highlights