General Ledger Definition, Importance, Account Types

Consider the following example where a company receives a $1,000 payment from a client for its services. The accountant would then increase the asset column by $1,000 and subtract $1,000 from accounts receivable. The equation remains in balance, as the equivalent increase and decrease affect one side—the asset side—of the accounting equation.

Is a general ledger the same as a balance sheet?

Owner’s equity is the portion of the business’s assets that you or your shareholders own. When your business records revenue from sales, this will increase owner’s equity because it means that the company has earned more money. On the other hand, if the company incurs expenses, this will decrease the owner’s equity because it means there’s less money available for you to draw out. But, the double-entry accounting method makes it easier to prepare financial statements and improves accountability.

How a General Ledger Functions With Double-Entry Accounting

Rather than combing through your bank statements, credit statements, and invoices when looking for one transaction, any stakeholder can just check the general ledger and see all accounting records in one place. A journal entry is a sequential list of accounting entries recording transactions while a GL is a formalized account system where recorded transactions in a journal are posted. In the following article, we will explore more about general ledger accounting, and how you can use FreshBooks software to simplify your bookkeeping as you track your company’s finances. “As transactions in your business occur, they are noted in the general ledger under each account using double-entry accounting. It’s essential to have an accurate accounting of all transactions so that financial statements are correct. This is often the role of a bookkeeper or other accounting staff,” said Cross.

General Ledgers: What Are They and Why They’re Important

In a manual or non-computerized system, the general ledger may be a large book. Organizations may instead employ one or more spreadsheets for their ledgers, including the general ledger, or may utilize specialized software to automate ledger entry and handling. Combining machine learning enabled financial processes and real-time recording of transactions, traditional accounting functions such as closing the books can occur in a fraction of the time it https://www.kelleysbookkeeping.com/expense-definition-and-meaning/ used to. Accounting ledgers can be displayed in many different ways, but the concept is still the same. For each account, the general ledger shows the account balance at the beginning of the period, all credits and debits that hit the account during the period, and the ending balance. These codes are sometimes called an “account number.” In this example, all puppet-making-material purchases are coded 205, all sales revenue is coded 103, and so on.

Types of General Ledger Accounts

Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to electing s corporation status for a limited liability company their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Include the account names and numbers, the date of each financial transaction, a reference number, a debit column, a credit column, and a balance column. You may also include a space for a short description of each transaction, for better clarity on your cash flow. Subsidiary ledgers include selective accounts unlike the all-encompassing general ledger. Sometimes subsidiary ledgers are used as an intermediate step before posting journals to the general ledger. By this same analogy, a ledger could be considered a folder that contains all of the notebooks or accounts in the chart of accounts.

At times this can involve reviewing dozens of journal entries, but it is imperative to maintain reliably error-free and credible company financial statements. Double-entry transactions, called “journal entries,” are posted in two columns, with debit entries on the left and credit entries on the right, and the total of all debit and credit entries must balance. Today, more than half of small businesses (53%) use an accounting software solution to handle their company’s financial data. That means they don’t need subsidiary ledger accounts because they use accounting software to record all transactions and prepare financial reports. Make it easier to keep track of your transactions, account debits and credits, tax deadlines, and more by incorporating FreshBooks accounting software into your business’s bookkeeping and accounting processes. FreshBooks has everything you need, including journal entries, accounts payable, balance sheets, and more, freeing you up to work on growing your company and increasing profits.

A general ledger is the system of record for an organization’s financial transactions, whether it’s maintained on paper, on a computer, or in the cloud. It uses numbered accounts, including debits and credits, from which a trial balance is computed. It holds all the data needed to prepare periodic financial statements—such as balance sheets, income statements, cash-flow statements, and other financial reports—on a monthly, quarterly, or annual basis.

Using a general ledger to keep clear records of your company’s financial data will give you a competitive edge, and make sure the information is ready when you need to prepare financial statements or find important data quickly. As your company grows, you can use the GL to track where your money is going and where it is coming from, using this data https://www.kelleysbookkeeping.com/ to make future business decisions. When starting a small business, you may not know all of the important ins and outs of record keeping. A general ledger can have any number of subledgers, sometimes also known as journals. Some of the most common types of subledgers include accounts payable, accounts receivable, cash, assets, expenses, and income.

As you can see, columns are used for the account numbers, account titles, and debit or credit balances. The debit and credit format makes the ledger look similar to a trial balance. Other ledger formats list individual transaction details along with account balances. A quick history lesson can help explain the difference between a journal and a ledger.

Luke O’Neill writes for growing businesses in fintech, legal SaaS, and education. He owns Genuine Communications, which helps CMOs, founders, and marketing teams to build brands and attract customers.

1. Organizing your accounting steps and processes is essential in proper double-entry accounting.
2. The GL serves as the basis for a company’s income statements, balance sheets, and cash flow statements.
3. Any small business owner can use accounting software to prepare and review any of these 3 statements and a general ledger.
4. To learn more about what Lightspeed Retail can do for your business, talk to an expert today.

This system acts as a master document detailing the business’s transactions over some time. These transactions are organized by accounts together with their dates, descriptions, and account balances—enough information to give you a bird’s-eye view of your business’s financial health. You may include individual assets and accounts like accounts payable and receivable, liabilities, inventory, and investments. This information is used to prepare financial reports, monitor finances, track cash flow, and prevent accounting errors or fraud. When expenses spike in a given period, or a company records other transactions that affect its revenues, net income, or other key financial metrics, the financial statement data often doesn’t tell the whole story. In the case of certain types of accounting errors, it becomes necessary to go back to the general ledger and dig into the detail of each recorded transaction to locate the issue.

With legacy accounting systems, the chart of account segments are configured at the time of deployment and fixed for the duration of their lifespans. Depending on the business’s needs, it typically creates chart of account segments for account, cost center, or department—or possibly even a product or project. A ledger is often referred to as the book of second entry because business events are first recorded in journals.

For instance, cash activity is usually recorded in the cash receipts journal. The account details can then be posted to the cash subsidiary ledger for management to analyze before it gets posted to the general ledger for reporting purposes. You no longer had to record general ledger in books; you could use Excel sheets and efficient accounting software. If you’re more of an accounting software person, the general ledger isn’t something you use but an automated report you can pull. Your software of choice will probably have an option to “View general ledger,” which will show you all the journal entries you’ve entered (for a given time frame). That’s because all of your company’s financial reporting—including its balance sheet—are prepared using information in the general ledger.