What Is a General Ledger In Accounting and How Does It Work?

By Indeed Editorial Team

Published 17 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A general ledger is an aggregated set of accounts that accountants use to monitor n organisation's financial information. It contains assets, liabilities, revenue, profit and loss records and other important financial information. If accountancy or bookkeeping careers interest you, then knowing what a general ledger is may help you succeed in either role. In this article, we discuss the question 'What is a general ledger?', explain why it's important and demonstrate how it works.

What is a general ledger?

The answer to, 'What is a general ledger?', is it's an important accountancy tool that bookkeepers, accountants and financial managers use to keep a comprehensive record of an organisation's financial transactions. Companies, sole traders, charities and public organisations may use general ledgers in their bookkeeping systems. A general ledger is also called a 'book of final entries', and it's often digitised using software that allows you to quickly process a large number of entries.

A general ledger contains a record of all the financial transactions made by a company. You refer to these as journal entries, while there may also be sub-ledgers that feed individual journal entries into the general ledger. Accountants regularly update the general ledger and store the information as a complete financial record that lists every transaction the company has made.

Related: What Is Financial Accounting? (With Examples)

Why is a general ledger important?

A general ledger helps accountants monitor complex financial transactions. Its goal is to provide a complete set of financial records, which accountants can then use to ensure the books balance and the organisation's finances are in order. When accountants update general ledgers accurately and regularly, they provide important financial information that the organisation can use for financial analysis. General ledgers are important for several other reasons, including:

  • Providing an accurate record of every transaction an organisation makes

  • Showing exactly what's coming into and going out of a company's accounts

  • Offering accountants a way to record and store large amounts of financial data

  • Helping create an overall representation of an organisation's transactions and finances

  • Assisting accountants when creating financial reports

  • Offering a basis for financial forecasts and data analysis

  • Reporting revenue and expenses accurately

  • Allowing organisations to monitor their spending and income

  • Assisting accountants when filing taxes

  • Keeping financial data organised and easy to access

  • Preventing accounting errors

Related: 12 Commonly Used Accounting Principles

How does a general ledger work?

A general ledger is a part of a double-entry accounting system that forms the basis for an organisation-wide record of financial transactions and accounts. A double-entry accounting system works on the premise that every credit has a debit, so accountants record individual journal entries in the ledger as either a credit or debit. The aim is to balance debits against credits and satisfy the following accounting equation:

Assets = Liabilities + Equity

A general ledger works by helping accountants balance the equation and so balance an organisation's books. They do this by compiling all the transactions for a specific period, such as monthly, quarterly or yearly, into the general ledger. They then subtract the total debits from the total number of credits and compare the figure they've calculated with a trial balance, which is the total balance of an organisation's accounts. If the figure the accountant calculates from the general ledger is the same as the trial balance, then they have balanced the books.

Related: 7 Types of Bookkeeping and Accounting Jobs (Plus FAQ)

What are the components of a general ledger?

Four main components make up a general ledger. Accountants ensure they have all of these components if they wish to balance the books accurately. The four components are:

  1. Journal entry: This is an individual entry made in the general ledger that contains information about the transaction and its entry date.

  2. Description: This is a brief description of the journal entry, including information on the type of transaction made.

  3. Debit and credit columns: This is a numerical figure that shows whether the transaction is a debit or a credit.

  4. Running balance: This is a running total of the balance in the general ledger. At the end of an accounting period, you add it up to give a final total.

Related: Is Accounting a Good Career? (With Pros and Roles to Consider)

What are the general ledger account categories?

A company likely has hundreds if not thousands of individual transactions that accountants input to a general ledger as journal entries. To make this task more manageable and to assist with data analysis, accountants often divide a general ledger into five separate categories. If a company has multiple departments, then they may each also have an individual ledger that feeds into the general ledger to make the accounting process simpler. The five separate account categories are assets, liabilities, revenue, expenses and equity:

Assets

An asset is a resource that an organisation owns and one it could sell to generate income. Organisations often classify assets by the length of time they're in use. Short-term assets may be disposed of or used within the same financial year they were acquired, while long-term assets may hold value for years at a time. Assets are a positive entry in a general ledger, and you enter them as debits.

Examples of short-term assets include:

  • Cash

  • Short-term investments

  • Prepaid expenses

  • Accounts receivable

Examples of long-term assets include:

  • Computer equipment

  • Vehicles

  • Patents

  • Property

  • Long-term investments

Related: What Are Asset Management Tools? (And Tips for Choosing One)

Liabilities

Liabilities are what an organisation might owe to other organisations or individuals. They represent debts realised in the future when the creditor asks for the money back. An organisation may take on liabilities, such as loans or credit, to pay for the running of its business, and it settles these liabilities when it pays in cash or asset transfers to cover the costs incurred. Accountants write liabilities into a general ledger as a negative entry.

Examples of business liabilities include:

  • Wages

  • Credit cards

  • Bank loans

  • Mortgages

  • Tax bills

  • Utility bills

  • Software subscriptions

  • Leases

Related: 20 Important Financial Terms for Every Professional to Know

Revenue

Revenue is the money that comes into an organisation's accounts from business activities, such as selling products or services to customers. A business requires constant revenue to balance its liabilities. Companies may have multiple revenue streams that generate income and require revenue to make a profit. This is a positive entry in a general ledger, as it leads to an increase in assets and a decrease in liabilities.

Examples of revenue include:

  • Sales income

  • Disposal of assets

  • Service fees

  • Royalties

  • Interest on investments

  • Sale of investments

Related: How to Become a Bookkeeper in Australia (With Steps)

Expenses

An expense is an operating cost that an organisation incurs, often hoping to generate revenue or profit in return for that expense. Expenses include all operating costs, and they may also include the depreciation of assets. They're negative entries in a general ledger, and an organisation balances them by increasing revenue or assets.

Examples of expenses include:

  • Subcontractor costs

  • Advertising costs

  • Travel expenses

  • Uniform expenses

  • Networking costs

Related: What Is an Operating Expense? (With Types and Examples)

Equity

If you calculate the total value of a company's assets and the total value of its liabilities, the difference between the two is equal to the total equity that appears in a general ledger. This represents the total amount that its owners invest in a business minus the current liabilities held by the company. For example, the equity would be the cash that remains if you were to sell all of a company's assets and then pay off all of its liabilities.

Examples of equity include:

  • Retained profits

  • Stock

  • Owner's equity

Related: What is Private Equity? (Including Related Careers)

What are general ledger posts?

Accountants often post general ledger accounts to an organisation's balance sheet or its income statement. A balance sheet is a permanent record of an organisation's finances and always carries over from one accounting period to the next. An income statement is temporary, and accountants close these at the end of each month or accounting period.

The information posted in the balance sheet includes:

  • Assets

  • Liabilities

  • Equity

The information posted to the income statement includes:

  • Expenses

  • Revenue


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