A general ledger is a master accounting document used to record every accounting transaction during the lifetime of your business.
A business’s bookkeeper or accountant records financial transactions in the ledger using the double-entry accounting method. This means that for every debit transaction (which increases assets or expenses, decreases revenue or liability), on the left side of the ledger, there is a corresponding credit entry (which does the exact opposite) on the right side—hence the term “balancing the books.”
The general ledger contains all the information you need to create financial statements (i.e. balance sheet, cash flow statement, and income statement), which enable you to evaluate the profitability, liquidity, and overall financial health of your business. Below, we’ll take a closer look at what a general ledger is and how to build one.
What Is a Business General Ledger?
The business general ledger organizes and summarizes all business transactions, which are used to create financial statements such as a balance sheet and income statement. The money your business earns and spends is organized into subledgers, which allow you to differentiate between various types of business transactions as they occur. Examples of common subledgers include accounts receivable (money owed to your business), accounts payable (money your business owes), cash (liquid assets your company owns), and inventory (sales or purchases affecting your inventory).
General Journal vs. General Ledger
The general journal is where a business keeps a record of unique, infrequent transactions not specified in other accounting journals, such as checks or invoices. Other examples of general journal entries include:
- Sales of company assets
- Interest income and expenses
Transactions in the general journal are recorded in a chronologically ordered list. These figures are raw and unbalanced until they are moved to the general ledger to make formal calculations.
Accounting software such as Freshbooks and Quickbooks enables you to create both a ledger and a journal and enter transactions at the same time using a single drop-down menu.
Business General Ledger Components
A general ledger categorizes and summarizes transactions into different accounts. Some of the most commonly used accounts include:
- Assets: Tangible or intangible items that add value to your business. Examples include cash, property, trademarks, and patents.
- Liabilities: Current or future debts your business owes to another business, vendor, or employee. Current liabilities include items like employee salaries and rent, while future liabilities include bank loans or lines of credit.
- Revenue: Business income derived from the sale of products and services. Other sources of revenue include the sale of an asset, interest, royalties, or any other fees your business collects from other individuals or businesses.
- Expenses: Money paid by the business in exchange for a product or service. Examples of expenses include rent, utilities, insurance, travel, and meals.
How To Build a Business General Ledger
There are a few crucial steps to follow in order to build a proper business ledger, which are outlined below.
Create the General Ledger Accounts
Each account should have its own page to make it easier for you to add or delete accounts. Create a table for each account with the following column headings:
- Reference number
- Debit or credit (expressed as a positive or negative number)
Then, assign a value to each account.
Some accounts will have a balance of zero. For example, if you have an account with a local contractor but do not currently owe them for services, that account will carry a zero balance.
Transfer the Transactions From the General Journal
Transfer the financial transactions from the general journal to the appropriate accounts on the general ledger with all detail. These transactions are usually recorded on a daily basis, and, as with general ledgers, you’ll have a credit and a debit for each entry.
Number the Transactions
Under the reference number column, put the number of the journal transaction on the general ledger account. Any important transactional data in the account should be transferred to a sub-ledger, such as accounts payable or accounts receivable. Sub-ledgers within each account provide transaction-specific details behind the entries documented in account ledgers, such as if they are debited or credited by cash, accounts payable, or accounts receivable. They may also contain information about transaction dates, descriptions, as well as amounts billed, paid or received.
If you’re using the double-entry accounting method, make sure your debits and credits balance.
Use the following equation to make sure you’re balancing the books correctly:
Assets = Liabilities + Owner’s Equity (the amount remaining after liabilities are deducted from assets as well as the amount the owner’s invested into the business)
If the assets you recorded don’t equal the value of your liabilities plus equity, your account balances need to be analyzed and corrected to avoid inaccuracies in your financial statements. Every account in the general ledger has either a debit or credit balance. When these are all added together, the end result should be zero because they are meant to offset each other.
When revenue is received, cash is debited; when an expense is paid, cash is credited. For example, say you purchased office furniture for your business at an expense of $1,000, paid from your checking account. You would debit the expense account and credit the checking account as follows:
[Debit] Office furniture expense $1,000
[Credit] Checking account ($1,000)
Why Businesses Need a General Ledger
A general ledger is an essential accounting document because it forms the basis for your financial statements, which draw on data compiled in the ledger. Having a list of expenses and income in one place also makes it easier to file taxes.
Additionally, when you apply for a business loan, lenders will invariably ask for financial records to assess your credit risk. The general ledger gives lenders an idea of your debt-to-equity ratio and other important metrics. In the event that you are audited by the IRS, the general ledger makes it easy for you to prepare for the audit since you have your financial records in one place.
Finally, general ledgers contain more information than your financial statements. In the event that expenses spike or profitability drops unexpectedly, consulting the general ledger and going through journal entries can help you root out fraud, accounting errors, or other discrepancies.
Example of a Business General Ledger
When you record a transaction from the general journal in the general ledger, each journal entry is composed of two parts: a debit and a credit. Any debit amounts should be listed on the debit (left) side of the respective account, and credit should be recorded in the credits (right) side of the respective account, hence why it appears twice in the general ledger. Here is a quick example.
Frequently Asked Questions (FAQs)
How do I reconcile accounts receivable to the general ledger?
Accounts receivable represents money that is owed to your business for goods or services delivered. Any differences between accounts receivable and your general ledger must be reconciled. This process typically takes place at the end of each month and entails matching the detailed amounts of unpaid bills or invoices to the accounts receivable total in the general ledger.
Make sure all transactions are recorded for the period, and that all sub-ledger balances have been posted to the general ledger. Some common reasons for discrepancies included voided or deleted transactions, journal entries made to the general ledger that were not reflected in the corresponding sub-ledger, or an entry posted to the wrong account. Once you’ve identified the errors, adjust entries as needed to reconcile the correct balances.
What is the usual order of accounts in the general ledger?
The order of accounts in the general ledger is as follows: assets, liabilities, owner’s equity, revenue, and expenses.
What should a general ledger audit trail include?
An audit trail consists of supporting documentation (electronic or otherwise) for a specific transaction. A general ledger audit trail should record all of the company’s transactions and all of the documentation (eg: purchase orders, bills, invoices) related to those transactions.