If you’re not an accountant, the term “general ledger” probably sounds pretty foreign. It wasn’t until I started learning about ledgers that I realized I (and probably you) am more familiar with the accounting concept than I initially thought.
Ledgers are used to meticulously document all of the money coming and going out of a business. While you and I rely on our banking apps to record all of our transactions, businesses need to maintain more detailed general ledgers to accurately and legally conduct financial transactions.
Below, I’ll share examples of general ledgers, how businesses document and measure finances using a general ledger, and how the general ledger helps businesses track financial health and growth over time.
Table of Contents
- What is a general ledger in accounting?
- How to Use a General Ledger
- Elements of a General Ledger
- General Ledger Examples
- General Ledger’s Role in Financial Planning
How a General Ledger Works
There are a couple of things to know about using a general ledger. First, it must always be in balance between the credit and debit amounts. Second, the information recorded holds all account information about a company over the course of its lifetime, and all of this information is needed to prepare the financial statements.
This used to be a more tedious and painstaking task than it is now. Before general ledger software existed, accountants had to use journals to record transactions and organize them into “credit” and “debit” columns. Now, there are many accounting software solutions companies can use to maintain their general ledgers.
The reason a general ledger details all financial transactions of all accounts is to accurately account for and forecast the company‘s financial health. Think of the general ledger as the main database of a company’s financial records and information, with other financial documents being derived from the information recorded in the general ledger.
How to Use a General Ledger
If you’re new to accounting and want to familiarize yourself with financial planning for your business, you’re probably wondering exactly how to use a general ledger. To help you out, I asked the experts what steps to follow when using a general ledger.
Define your accounts.
First, make sure you have access to all of your company’s financials so you can organize data into the appropriate categories. Then, decide which accounts you want to organize into your general ledger.
“To maintain a general ledger, a company must define the buckets in which it wants to measure accounting information,” says Robert Belsky, CEO at Bob’s Bookkeepers. “This is called a chart of accounts.”
A chart of accounts, or COA, is an index of all financial accounts in a company’s general ledger. Not only does it organize all of the company’s finances into categories, but it can also be shared with investors or shareholders as an overall view of the company’s financial health.
Categorize transactions.
Next, you’ll record and categorize all business transactions into relevant buckets, balancing debits and credits.
“Over a period of time (e.g., weekly or monthly), all of these entries will be reconciled,” says Alex King, accountant and founder of the personal finance platform Generation Money. “This means each debit and credit must be appropriately recorded and logged so that the balance sheet will balance.”
Review bank reconciliations.
Finally, an accountant typically reviews the entries and posts the information to be used in generating a trial balance and financial statements.
Once the reconciliation is done, these initial entries will be transferred to the general ledger which is the “golden source” of accounting data, says King.
Not only does the data in your general ledger serve as the foundation of your company’s accounting, it can also be used for financial analysis, suggests King.
“As an accountant, I can use this information to analyze various account lines to identify trends or anomalies and to check against budgets and long-term plans,” he says. “The general ledger is useful for drilling down into the details behind the financial statements and helps understand the line items better. For example, revenue lines will show if there’s a particular customer or geographic region where sales have trended differently to expectations.”
Elements of a General Ledger
Now that I’ve shared how and when to use a general ledger, let’s dig into what’s included in a general ledger.
A general ledger is made up of every financial transaction made by a company and organized into different categories. There are five different categories the general ledger is broken down into. These categories are known as “accounts.”
Ledger Accounts
The general ledger typically includes a front page that lists the names of the accounts documented within, and this list is known as the “chart of accounts.” The documentation of one account within the general ledger is referred to as an “account ledger.”
1. Assets
Assets are any resources that are owned by the business and produce value. Assets can include cash, inventory, property, equipment, trademarks, and patents.
2. Liabilities
Liabilities are current or future financial debts the business has to pay. Current liabilities include things like employee salaries and taxes. Future liabilities can include bank loans or lines of credit and mortgages or leases.
3. Equity
Equity is the difference between the value of the assets and the liabilities of the business. If the business has more liabilities than assets, it can have negative equity. Equity can include things like common stock, stock options, or stocks. This all depends on whether the company is privately or publicly owned by owners and/or shareholders.
4. Revenue
Revenue is the business’s income that is derived from the sales of its products and/or services. Revenue can include sales, interest, royalties, or any other fees the business collects from other individuals or businesses.
5. Expenses
Expenses consist of money paid by the business in exchange for a product or service. Expenses can include rent, utilities, travel, and meals.
Sub-Ledgers
Sub-ledgers within each account provide details behind the entries documented in account ledgers, such as if they are debited or credited by cash, accounts payable, accounts receivable, etc.
Double-Entry Bookkeeping
The double-entry bookkeeping method ensures that the general ledger of a business is always in balance — the same way you and I might keep our bank accounts balanced. Every entry of a financial transaction within account ledgers debits one account and credits another in an equal amount.
For example, if $1,000 was credited from the Assets account ledger, it would need to be debited to a different account ledger to represent the transaction.
This bookkeeping method helps ensure that the business never over-extends itself financially and that the general ledger is always in balance to maintain the accounting equation:
Assets = Liabilities + Equity
General Ledger Examples
Below is an example of what a blank general ledger sheet would look like before filling in any accounting information. In the “Account” cell, you would fill in which account ledger’s transactions you were recording:
If you’re like me and appreciate seeing templates filled out, here’s what a few accounts within the general ledger would look like filled out with transaction information.
As you can see below, each account has a specified purpose, and transactions related to those accounts go in their relevant columns.
Looking for more templates as you work on your business accounting? You can download these free financial planning templates and easily fill them in with your company’s financial information.
General Ledger’s Role in Financial Planning
Next, I’ll dive into a few other financial accounting documents that are closely related to, but distinct from, the general ledger. You might see these terms used interchangeably with “general ledger” but they all have different meanings.
General Ledger vs. General Journal
Sometimes referred to as “the book of original entry”, the general journal lists all financial transactions of a business. This differs from the general ledger, which organizes and balances transactions.
A business’ financial transactions are first recorded in a general journal and listed according to date. From there, the specific amounts are posted into the correct accounts within the general ledger.
General Ledger vs. Balance Sheet
A balance sheet provides a quick snapshot of the business’s financial health at a specific moment in time by measuring if its accounting equation is balanced.
As Belsky explains, “The balance sheet is one of the three main financial statements a business maintains. You can derive the income statement and the balance sheet from a general ledger.”
The balance sheet documents the accounting question measured above (Assets = Liabilities + Equity) and pulls those numbers from account ledgers within the general ledger.
Balance sheets are typically used when businesses are being evaluated by banks, creditors, or investors, versus general ledgers, which are maintained internally.
For example, here’s how HubSpot’s balance sheet looks. You can see the real-time version here.
General Ledger vs. Trial Balance
A trial balance is an internal report that lists each account name and balance documented within the general ledger. It provides a quick overview of which accounts have credit and debit balances to ensure that the general ledger is balanced faster than combing through every page of the general ledger.
What I Learned About The General Ledger’s Role in Financial Planning
While the term “general ledger” sounds old-school (and maybe even intimidating if you’re like me and don’t have any accounting experience), it’s simply a system to record all of your business transactions.
My biggest takeaway is that most of us probably already use some sort of general ledger to manage our financial transactions, whether that’s through a banking app, a checkbook, or accounting software.
But for businesses who want to ensure they’re properly tracking and recording all of their financial data, a general ledger is essential. By using financial planning templates and accounting software, creating and using a general ledger has never been easier.