What Is a General Ledger? Definition, Functions and Key Elements
By Indeed Editorial Team
Updated August 30, 2021 | Published February 4, 2020
Updated August 30, 2021
Published February 4, 2020
Maintaining a general ledger is an essential part of a business’s bookkeeping. A general ledger, also known as “the book of final entry,” is a record of a company’s financial transactions. They are listed as debits or credits, known as a double-entry system and validated by a trial balance.
Accountants, company managers, analysts, investors and other stakeholders use general ledgers to assess a company’s financial performance. In this article, we discuss what a general ledger is, its components and page structure as well as how to input pertinent data based on financial accounts.
A general ledger is the foundation of a double-entry accounting system.
General ledgers transactions are entered as either a debit or a credit.
A general ledger provides information to produce other financial reports.
General ledgers list transactions under seven categories: gain, loss, assets, liabilities, equities, revenue and expenses.
Purpose of a general ledger
A general ledger serves as a foundation for a company's financial record-keeping system for an accounting cycle. It’s a record of all of the company’s accounts, which could number in the hundreds, and the transactions within them. Transactions, referred to as “journal entries,” are posted as either a debit or credit and their totals must balance. Balancing the budget involves subtracting total debits from total credits.
General ledgers are part of a double-entry accounting system. They follow the equation: Liabilities + equity = assets.
For example, if a company makes a sale, its revenue and cash balances increase by an equal amount. If it borrows money, the cash and liability balance increase equally.
The person maintaining the ledger, typically an accountant, compares a company's debits and credits against a trial balance. The trial balance lists each general ledger account along with its balance. This makes it easier for an accountant to locate any errors and make adjustments. The goal is a balanced budget with credits and debits equal to each other.
General ledgers can benefit businesses by:
Providing accurate records of all transactions
Reporting revenue and expenses in real-time to stay on top of spending
Organizing expenses and revenue in one place for easier tax filings
Compiling key information for financial documentation
Read more: What Is a Ledger?
How does a general ledger work?
At the end of a specific period (like a month, quarter or year), an accountant will separate transaction data by type. That data comes from journals where daily transactions are recorded. The accountant closes out those accounts and summarizes them in a general ledger.
In some cases, there are too many transactions in one account to list within the general ledger, so those transactions may be kept in a subsidiary ledger. Those accounts are summarized and recorded as control accounts in the general ledger. Accounts that may become control accounts include accounts receivable, inventory, equipment and accounts payable.
Finally, the accountant generates a trial balance and checks it for errors. If the debit and credit balances don’t match, the accountant must determine what is missing or miscalculated. The balance is adjusted as errors are found and entries are added. The adjusted trial balance is then used to generate financial statements.
General ledger components
A general ledger has four main components:
Journal entry: Information about each journal entry posted to an account and the entry date.
Description: A brief description of the transaction.
Debit and credit columns: Each journal entry is posted as either a debit or credit.
Balance: A running balance is kept for each account. At the end of the accounting period, the ending balance is calculated.
General ledger account categories
A general ledger uses five types of accounts or categories under which a business classifies its transactions. Each category may be divided into subledgers, which include details like the amount of cash on hand, accounts receivable and accounts payable.
Assets are resources a company can use to generate revenue.
Asset accounts may include:
Businesses can categorize assets by their short-term or long-term usage. Short-term assets include cash, accounts receivable and prepaid expenses because the company expects to consume those assets within a year. Long-term assets include land, buildings, computers and software since entities expect to use those assets for years to come.
Businesses will also differentiate between tangible and intangible assets. Tangible assets, like land and equipment, each have a value, provided they were business purchases. Intangible assets, like licenses, copyrights and patents, may only have value if they were business purchases or acquired by a business owner.
Liabilities are legally binding financial obligations one company owes to another business or person. Businesses increase their liabilities to fund everyday operations. To settle liabilities, businesses must pay cash or transfer assets to the other company or individual.
Liability accounts include:
In the context of a general ledger, equity is the difference between total assets and liabilities. It is a net amount found by subtracting the amount of money a business owner has invested in a business from their total earnings. For example, if a company sells all its assets for cash to pay off liabilities, any remaining cash is equity.
Equity accounts include:
Revenue comes from a company’s sale of products or services. It can represent an increase in its assets or a decrease in its liabilities.
Revenue accounts include:
Expenses help generate revenue. For example, the lease on a building or the cost of utilities each month. Expenses are also related to assets. Specifically, an expense can also take the form of an asset's depreciation, which a business calculates over time.
Expense accounts include:
General ledger posts
General ledger accounts are posted to a balance sheet or an income statement. Balance sheet accounts are permanent and carried over from one period to the next. They include:
Income statement accounts are temporary and closed out at the end of each month. They include:
The format of a general ledger page
For each page of a general ledger, there must be separate columns for debits and credits. The debits are usually on the left side of the page with the credits on the right.
Debits represent increases in a company's assets or expenses or decreases in that company's liabilities or equity.
Credits represent increases in a company's liability or equity or decreases in that company's assets or expenses.
Items listed under the debits column should also be reflected in the credits column so that the ledger will be balanced.
Accountants can best keep track of account transactions by also including the date, description and balance total for transactions on each ledger page. A page set up this way is like a checkbook. Also, general ledger accounts may have unique identifying account numbers which may be three-digit or complex codes that identify departments and subsidiaries.
The format of a general ledger page typically looks like this:
|Account: Name of account|
|Account No. ###|
|Account No. RTO34374355|
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