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A general ledger is the master accounting document that contains all of the accounts a business has—meaning it records all of the transactions made over the life of a company. The general ledger includes transactions separated by type: assets, liabilities, equity, revenue, and expenses. A general ledger is used as a reference, storing all of a business’s financial information, and is also used to create a variety of financial statements.
When it comes to business accounting, there are a number of documents and reports that are essential—not only because they’re used to gain financial insights regarding the growth of your business, but also because they serve as a record of your business’s financial history. Perhaps one of the most important of these accounting reports is the general ledger.
If you’re wondering, “what is a general ledger”—this guide is here to help. We’ll explain the general ledger definition and how this document works, offer general ledger examples, and finally, discuss why this accounting document is so important to your business.
Before we dive into the details regarding this accounting document, let’s start with the basics and answer the question: What is a general ledger?
In essence, the general ledger is the core of your accounting system, serving as a record of all of your accounts and detailing all of the transactions your business makes. Typically, each of your transactions within the general ledger is broken up into accounts, categorized as assets, liabilities, equity, revenues, and expenses—as designated within your business’s chart of accounts.
On the whole, then, the general ledger is used as a reference document, as well as a resource to create financial statements in order to evaluate the health and progress of your business.
With this general ledger definition in mind, let’s break down how this accounting document works.
As you go about your day-to-day business operations, you make entries within your accounting system—checks, invoices, and deposits. Each of these transactions is recorded in your general ledger, which is known as “posting transactions.” For example, if you write a check to pay rent, that transaction will hit two accounts in your general ledger.
First, it will credit (lower the balance of) your business bank account and debit (increase the balance of) your rent expense account. This equal debiting and crediting is part of the double-entry accounting method. This method ensures that your general ledger is always in balance, maintaining the equation:
Assets= Liabilities + Equity
As you can see in the photo below, each account (assets, liabilities, expenses, etc.) on the general ledger has what’s considered a “normal balance.”
Photo credit: WBBBB Accounting & Management Services
It’s important to note, however, that not every transaction will hit your general ledger. There are a few transactions that can be considered “non-posting,” which will not be recorded in the general ledger. To explain, QuickBooks Online breaks down posting vs. non-posting as detailed below:
So, what makes these six transactions non-posting? Let’s explain:
With all of the transactions that are posted in the general ledger, each transaction is recorded in the appropriate account, or category, as we mentioned above. In order to properly understand your business’s general ledger, it’s important to understand what each of these categories means. Let’s explore further:
These terms are probably familiar—as they’re used in a variety of other accounting reports and financial statements. Again, this is one of the reasons that the general ledger is so essential to your processes.
For example, assets, liabilities, and equity are the three pieces that make up your balance sheet. Your balance sheet lists your permanent accounts, aka the ones that will not be closed out at the end of the year.
The remaining four accounts on the list above are what you’ll find on your profit and loss or income statement. Unlike your balance sheet, these reports include temporary accounts, as they will be closed at the end of the year. You’ll begin the next year with no balance in all of these categories.
On the other hand, any balances you end the year with are combined and usually entered into “stockholders’ equity” on the balance sheet.
Now that we’ve explained the different pieces that make up the general ledger and how this document works overall, let’s explore a general ledger example.
In the photo below, you’ll see an example of a blank general ledger sheet. This example would accommodate one account type and you would complete the same type of sheet for each account within the general ledger.
Photo credit: Double-Entry Bookkeeping
With this general ledger example, you would complete the “account” box with whichever account’s transactions you were recording, whether assets, liabilities, equities, etc. Then, you would record each transaction made, filling in each of the boxes: date, description, journal reference, transaction, and balance.
As you can see, there are both debit and credit boxes to accommodate the double-entry method of accounting. It’s important to remember, that if, for example, you recorded $100 as a credit from the assets account, you would also have to debit the other appropriate account category.
Although the general ledger example we just discussed shows how you would complete this document manually, if you use accounting software, you don’t have to worry about filling out this report by hand.
Whether you use QuickBooks Online or Desktop, Xero, or FreshBooks, you can access your general ledger within your system. As your accounting solution records your transactions and you manage your income and expenses within that platform, the software can automatically generate your business’s general ledger.
If you’re unsure how to create this report within your respective accounting solution, it’s most likely located in the reports section of your software. However, if you still can’t find it, we’d recommend consulting the platform’s support center or knowledge base or talking to your bookkeeper or accountant.
Additionally, we’ve also gathered examples on how to find your general ledger within some of the most popular accounting software systems:
If you don’t use an accounting software system, you’ll need to manually complete your general ledger as we discussed in our first example. On the whole, we’d recommend using accounting software (even a free one, like Wave accounting), as it can streamline your processes and prevent manual error.
However, if you’re just starting out and not quite ready for an accounting software platform, you can use one of these general ledger templates:
Although all of these general ledger templates can be used to record your transactions, we’d recommend using an Excel file. Using Excel will make it easier to transition this report into an accounting software system if you ever need to do so.
As you’ve seen through our breakdown, examples, and templates, there are numerous accounting terms that you find in the general ledger that are also part of other financial reports. Therefore, you may be wondering: How does the general ledger compare?
First, let’s talk about the chart of accounts. The chart of accounts is often confused with the general ledger—however, as we briefly mentioned, your chart of accounts is the listing of the accounts that you’ve made available for recording transactions in your general ledger.
Similarly, the general journal is often confused for the general ledger. The general journal, however, is simply a chronological record of transactions. The general ledger, on the other hand, is the most comprehensive summary of the different parts of your business accounting.
The general ledger is the source from which all financial reports are generated, including your profit and loss statement and balance sheet. Unlike some of these other financial reports, though, you don’t necessarily need to review your general ledger on a weekly or monthly basis—as long as you’re reviewing other financial statements.
So, if you don’t have to review your general ledger frequently, you may be wondering why this report is so important. There are a number of reasons; however, on the whole, consulting this accounting report is a simple way to view your business financials in their entirety.
Therefore, the general ledger can actually be one of the most useful accounting tools you have, allowing you to:
At the end of the day, understanding and reviewing your business’s accounting reports—like the general ledger—are essential to growing your operation and keeping track of the health of your finances. As the basis of your accounting system, the importance of the general ledger should not be overlooked. You’ll want to be sure you understand how it works, how to generate the report, and what insights can be gathered from it.
Therefore, due to the significance of the general ledger, we’d recommend using an accounting software platform to connect your accounts, record your transactions, and maintain your books. By using accounting software, you’ll lessen the likelihood of manual error, you’ll be able to generate your general ledger automatically, and you’ll be able to create additional reports to use for financial analysis.
Moreover, accounting software will, more than likely, give you the ability to grant access to your bookkeeper or business accountant so that they can help you maintain your financial processes within the system.
Whether you use an accounting platform or maintain your records manually, though, you’ll want to remember to review them periodically to ensure that everything is accurate, up-to-date, and running smoothly.
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