What is a General Ledger? How GL Works in Accounting

Transaction data is segregated, by type, into accounts for assets, liabilities, owners’ equity, revenues, and expenses. 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. This system acts as a master document detailing the business’s transactions over some time.

A Beginner’s Guide to General Ledgers

Every business must strive to maintain accurate accounting records to generate reliable financial statements. General ledgers are essential as they help you record all your financial transactions. But creating a manual one opportunity costs and the production possibilities curve is a complex undertaking—and you’re more likely to make accounting errors without a reliable system in place.

These accounts help in organizing the general ledger accounts properly and recording transactions quickly. For example, you’ll need to record rent expenses every month if you rent computers and decide to prepay the rent in January for the next twelve months. This is done because you do not want to understate any expenses in your financial statements for the next 12 months. The assets are categorized into current assets and fixed assets, and are typically reported on the left hand side of your company’s balance sheet. Say, for instance, you were overcharged for an item you purchased, it then becomes challenging for you to identify this transaction if the ledger accounts are not prepared.

1. A general ledger contains all the ledger accounts outside of the sales and purchases accounts.
2. If you’re ever audited, you won’t have to dig through paper files to get organized.
3. As the business grows and the number of accounting staff increases it is impractical to have only one ledger.
4. A small business will maintain all its accounting records using a single general ledger supported by the books of prime entry such as day-books and journals together with accounting source documents.
5. This data from the trial balance is then used to create the company’s financial statements, such as its balance sheet, income statement, statement of cash flows, and other financial reports.

A Balance Sheet Transaction Example

If you are preparing the journal or ledger manually, you or your accountant will need to go through each of the accounts individually. A general ledger contains all the ledger accounts outside of the sales and purchases accounts. Therefore, you need to prepare various sub-ledgers providing the requisite details to prepare a general ledger. A sales ledger, or debtors ledger, is one of the three types of ledgers that you prepare as a firm or a business entity. In this instance, debtors refer to the business entities to whom you have sold goods that you manufacture. This journal entry would then be transferred to the respective ledger accounts as follows.

I don’t pay for much with checks anymore, but when I do write one to pay rent every month, I always write down the check number and the amount in the little paper ledger at the front of my checkbook. It’s available to download in Google Docs, Google Sheets, XLS, DOC, and PDF, making it easier to see capital stock and surplus definition your business finances at a glance. See our collection of Excel accounting templates for additional accounting resources.

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Businesses will create separate categories for such transactions, which are known as accounts. All account records of a company will be listed and contained within the general ledger, or principal book of accounts. 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 to make future business decisions. You record the financial transactions under separate account heads in your company’s general ledger, so at the end of the accounting period, you close these accounts. You do this as a result of balancing the debit and the credit sides of such accounts.

A control account operates the same as general ledger account but you record only the summarized information regarding a specific account. It does not contain detailed information related what are adjusting entries to such an account, so you need to refer to a related subsidiary ledger in order to get details of such a control account. The accounting professional auditing your company accounts may also ask for things like sales receipts, purchase invoices, in order to check if proper amounts were charged. 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.

Step #3: Record entries in the general ledger

Using a GL will keep you up-to-date on your cash flow, debts, and spending, so you can watch for trends and make adjustments to your business operations to maximize profits over time. The following are the steps to a proper general ledger accounts reconciliation in detail. To find more templates and advice on tracking small business expenses, see our comprehensive list of small business expense templates. See our free small business bookkeeping resources for additional bookkeeping tools.