What is a general ledger? (purpose, software, and components)
In this guide, we'll explain general ledgers, who manages them, and how teams can use them for financial insights.
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1 minute
October 10, 2024
The general ledger is the financial data source for bookkeeping, financial reports, and expense management. Business transactions are generally recorded in the general ledger using a double-entry bookkeeping methodology. Sub-ledger accounts can be set up to make reporting more granular for decision-making. This article will explain how a small business owner can use a general ledger to gauge the financial health of their business. Some key takeaways are:
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A general ledger is a double-entry accounting system used to record financial transactions. The two sides of the ledger are called “assets” and “liabilities.” Money coming into the company is recorded as a debit, and money going out is recorded as a credit. It’s called double-entry because every debit should have a corresponding credit and vice versa.
To facilitate this process, the bookkeeper sets up general ledger accounts to track money movements. For instance, paying a bill creates a credit transaction because money is moving out of the account. The corresponding debit transaction would be a decrease in accounts payable that reduces liabilities.
The general ledger typically includes journal entries explaining why funds move between accounts. They can be helpful when account balances cannot be reconciled. Those numbers should be correct for financial statements to be accurate. Your balance sheet and income statement are dependent on them.
The company's stakeholders should be able to see the accounts payable and accounts receivable numbers. The cash flow statement provides a broad overview. The general ledger is more granular. It shows the actual movement of money between asset and liability accounts. That information can also be used for budgeting and calculating owner’s equity.
The general ledger is one of your most important accounting tools. When questions arise about expense accounts or a reconciliation process that doesn’t balance, you can always check the ledger to see where the error occurred. Larger companies keep a subsidiary ledger for each department to make it simpler to check financial records.
The bookkeeper typically performs general ledger work. They record transactions, create account names, and provide detailed information that the accountant can use to create a balance sheet to report on the company's financial position.
Companies doing multi-entity accounting may employ several bookkeepers, but there will typically be only one general ledger. Each division or location can have a sub-ledger and general journal to keep track of debit and credit balances. The financial accounting for that setup is more complicated, but it doesn’t change the bookkeeping.
The business owner is the person ultimately responsibility for the accuracy of the general ledger. In larger corporations, that burden falls on the shoulders of the CEO, president, or board of directors. Those companies usually have a finance committee and internal auditors to review the general ledger and ensure there are no mistakes.
General ledger accounts are the sub-accounts that identify cash inflows and outflows. Accounts payable and accounts receivable are both general ledger accounts. Transactions in either of them affect the cash account. Paying a bill decreases cash while receiving a payment increases it. Either action requires two bookkeeping entries: a credit and a debit.
Another example of a general ledger account is “salaries expense.” It’s an asset account used to set aside money owed for salaries but not yet paid. On the liability side of the ledger, the bookkeeper creates a “salaries payable” account so you can create a debit and a credit when salaries are paid. This is how the general ledger is balanced.
Cash, accounts receivable, inventory, investments, land, and equipment are examples of general ledger asset accounts. They are on the left side of the ledger. Liability accounts on the right side include accounts payable, notes payable, accrued expenses payable, and customer deposits.
A profit and loss statement (P&L) is an income statement. It breaks down income and expenses by category. The general ledger is a detailed list of all transactions. It’s the data source for compiling an income statement and other financial reports. Spend analysis may be required after you read an income statement, but you’ll need the general ledger to do it properly.
The general ledger may also come into play if you’re doing cost accounting. You can use the P&L to see income and expense categories, but the general ledger will tell you which expenses should be excluded in cost projections. An example of this is loan payments for a loan that will be paid off before the time period you’re doing cost projections for.
As a small business owner, you’ll likely spend more time reviewing a P&L than you will looking at your general ledger. The P&L is an overview of income and expenses. It’s designed to streamline the financial evaluation process. Think of the P&L as the “what.” The general ledger shows you the “how.” You’ll need it when you want to know the “why.”
Think of the general ledger as accounting records. Financial data is entered there so it can be retrieved later when questions are asked about the company's financial activities. Those records will also be used at the end of the quarter to create financial statements, so they need to be accurate.
Double-entry bookkeeping requires a debit and a credit entry for every transaction. For instance, purchasing inventory could create a credit on the right side of the ledger in “accounts payable.” The corresponding debit would be in the “inventory” account on the left side of the ledger because inventory is an asset. For proper balance, credits should always equal debits.
Your accountant will use the general ledger maintained by your bookkeeper to create a chart of accounts. That chart generates a “trial balance” to verify the accuracy of debits and credits. If they are equal, you’re okay. If not, someone will need to go back in and find out where the errors were made.
The underlying formula for double-entry bookkeeping is called the “accounting equation.”
It’s a simple formula: Assets - Liabilities = Shareholder Equity.
Accountants use it when creating a balance sheet. The numbers there won’t work if there are errors in the general ledger. That’s why this accounting method is important. Make sure your credit column matches your debits.
Ensuring your general ledger is done properly begins with checking journal entries for the four elements they should contain. This applies to entries on either a debit or credit account on either side of the ledger. Each entry should have the following four parts:
The journal entry should include the entry number and date of the entry. The entry number differs from the account number from which the funds will be deposited or withdrawn. It’s an internal number that tells you where this entry is in the order of all the other general ledger entries throughout a designated time frame, typically a fiscal year.
The transaction description should be brief and comprehensive at the same time. This is where you’d enter an account number if you’re using different accounts. You’ll also want to remember that others may be reviewing the general ledger, so don’t use your own personal shorthand for descriptions. Make it clear so no one comes back to you with questions later.
The general ledger entry should be set up with a debit and credit column to clarify the transaction's nature. If there are multiple entries on one day for a general ledger account, you can list them all on the same entry. For instance, paying a bill from accounts payable on the same day you receive a new bill. That can be expressed as one entry.
The final component to include on a general ledger entry is the running balance for the sub-account in which you perform the transaction. In the example above, you’d subtract the payment from accounts payable and add the new bill to get the running balance. You should also include a “net movement” line item for the transaction, but that’s not required.
Single-entry accounting records the cash flow. That’s okay for a bank statement, but it won’t work for a general ledger. You need to use double-entry bookkeeping to satisfy the requirements of the accounting equation. Failing to do this will make creating a balance sheet and income statement with accurate numbers challenging.
The general ledger accounts should match the balance sheet and income statement categories. This streamlines the process of creating a trial balance to get the final numbers that will be used for financial reporting. Your asset side should include cash, inventory, and accounts receivable. Your liability side accounts payable, notes payable, and loans payable.
Another common asset category is expense accounts. These accounts are set up as an asset and funded by transfers from the general cash account. A corresponding expense payable account should be on the opposite side of the ledger to balance debits and credits. We cited an example above when we spoke about salary expenses and payables.
General ledger accounts can be a part of an expense and receipt management system for larger companies that set up individual ledger accounts for different departments. One of the most common examples is having sales expense and payable accounts. The bookkeeper can attach copies of receipts to the ledger entries to assist with cash flow management.
The trial balance calculated at the end of a fiscal period is intended to provide evidence that a general ledger is properly balanced. Unfortunately, there are circumstances where that may not be the case. If a transaction is not recorded, that entry's corresponding debit or credit might also not be included. Debits and credits will still match, but something is missing.
General ledger reconciliation is the process of matching general ledger entries with bank and credit card statements to ensure that all data is present. It can be labor-intensive, and the pricing for those who do it can be high. Thankfully, there is technology available to lighten the load. We’ll review some of the better general ledger software below.
There are several software programs you can use to manage your general ledger. Some have AP automation and invoice processing to provide an all-in-one accounting experience:
Netsuite is easy to use, with an intuitive dashboard and several billing models. It offers automated invoicing that your company can use to streamline accounts receivable and cash flow management. Its general ledger technology is state-of-the-art, making it a great fit for eCommerce, sales, technology, or general retail companies.
Consistently rated as the top accounting software for small businesses, QuickBooks offers an online application with general ledger technology and financial reporting. You can run on-demand P&L income statements, track invoices and expenses, and connect to your bank and credit card accounts via API. You can also integrate your payroll.
Sage has a vast following in the small to medium-sized business (SMB) community. Sage is a finance provider to businesses in multiple industries. It offers real-time visibility for complex business structures and integrates with CRM, payroll companies, and point of sale (POS) systems.
Most enterprise resource planning (ERP) software includes a general ledger function but also offers accounts payable, accounts receivable, payroll, and financial reporting. ERP is significantly more expensive than general ledger software. Look into it if you’re researching accounting tools, but don’t buy anything you don’t need. There are other options.
A general ledger is an accounting tool that records and archives financial transactions. It’s managed using a double-entry bookkeeping system that ensures the company’s financials adhere to the accounting equation used to create balance sheets. A general ledger is reconciled when the credits equal the debits and all transactions are recorded.
All business financial transactions should be recorded on the general ledger, including cash inflows (debits) and outflows (credits). The general ledger has an asset side and a liability side to ensure a balanced record of accounts. It’s also set up with sub-accounts to record accounts payable and receivable, along with other assets and expenses.
Each general ledger account records specific business transactions for certain business functions. These could include salary expenses and payables, sales expenses and payables, receivables, etc. When a credit is applied to one account, there should be a corresponding debit to another. This double-entry system ensures accurate company accounting.
The four C’s of the general ledger are (i) chart of accounts, (ii) calendar, (iii) currency, and (iv)accounting conventions or standards. The first three are specific identifiers for the contents and configuration of the general ledger accounts. Convention is the standards and guidelines used by the accountant to ensure integrity and transparency.
You may hear a general ledger described as the “book of final entry” because it is the official record of all business financial transactions. By definition, it includes classifications logged in a double-entry system, the capability for creating a trial balance, transaction categories, and specific user permissions for bookkeepers and accountants.
No. The profit and loss (P&L) statement is an income statement that categorizes and tallies income and expenses. The general ledger is a detailed accounting of all financial transactions recorded using a double-entry bookkeeping system. The general ledger is the data source for the income statement, balance sheet, and other financial reports.
The general ledger is an essential accounting tool for businesses of all sizes. It’s maintained using a double-entry bookkeeping system. Your general ledger is a data source for your income statement and balance sheet, so accuracy is critical. To ensure that happens, perform regular general ledger reconciliation quarterly or annually.
When it’s time to decide on the right platform to help you manage your GL, consider that Rho has direct integrations with many of the most popular accounting platforms such as Quickbooks and Netsuite.
This helps you speed up your monthly book-closing processes, sync and reconcile transactions as they happen, saving you time.
Learn more about Rho’s integrations today.
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