The General Ledger can be a mystery for business owners without a background in finance and accounting, or who are running small businesses. Let’s walk through the basics.
Ledger Basics
When it comes to the general ledger and accounting, many business owners aren’t sure whether they need one, how it differs from an accounting balance sheet, and what journal entries are. We have a simple breakdown of the absolute basics below.
Remember, this is a basic overview. CPAs who manage ledgers are tested and certified in this area of accounting, and while this general information is helpful, ledger management requires expertise, certification, and an adherence to accounting best practices. We hope you’ll consider trusting a Certified Public Accountant for your ledger needs.
What is a ledger?
When it comes to accounting, a ledger is a book and/or digital book that records transactions for different accounts. You might also hear this called a principal book of accounts, general ledger, sales ledger, purchase ledger. Your company may have one ledger or multiple ledgers, with entries that range from cash and accounts receivable to inventory and accrued expenses.
What is a general ledger?
In bookkeeping, a general ledger is the main document where you’ll find a record of all of your business activities. It’s the main record that summarizes and records activity across all of a company’s financial accounts. This is typically part of your accounting software or a separate spreadsheet, and covers…
- Revenue
- Expenses
- Equity
- Assets
- Liabilities
Each of these areas will also have subcategories for other accounts, like inventory, equipment depreciation, petty cash, sales discounts, freight, and many others.
How is the ledger organized?
In bookkeeping and accounting, the general ledger is organized by account, and then chronologically. It can include a combination of columns like…
- Account Number
- Account Name
- Date
- Description
- Debit
- Credit
- Balance
You will typically specify each entry with the account name and number.
Ledger entry meaning: what exactly is a ledger entry?
A ledger entry is a single record of any sort of business transaction.
Example: A client sends in a check for $1,300 for services rendered.
For this record, your accountant or bookkeeper will create an entry outlining the amount, the date, and increase the balance column by $1,300, and deduct $1,300 from accounts receivable balance.
What are general ledger journal entries?
A journal entry is created any time your business makes a transaction, so that it can be recorded in your books. Your journal is a sequential list of all business transactions, line itemed to include information like date, account name, amount, and a general description of the transactions.
Journal entries help you stay organized.
General ledger vs. subledger
The key difference between a general ledger and a subledger is that the general ledger is your master, meaning it holds information on all accounts, while a subledger can be used for a collection of subaccounts.
Example:
- General Ledger
- Assets Subledger
- Equipment
- Property
- Cash on Hand
- Purchase Ledger
- Inventory
- Suppliers
- Sales Tax
- Assets Subledger
A subledger is also sometimes called a subsidiary ledger.
Common Questions About Ledger Use
Now that you know a little bit about what a ledger is and how it works, let’s dive into some common questions.
Should my ledger be digital, handwritten, or both?
Accounting best practices dictate that you should use accounting software for your ledger. However, some businesses will elect to maintain a handwritten ledger as well, partly because it was the way of accounting for so long, and partly as a backup. However, one key thing to remember is that the more times you have to manually input the same data, the more opportunity you are creating for error.
Your best option is to use an accounting software that has built-in functioning for double entry accounting.
What are some common ledger accounts?
Most general ledger accounts fall under a few key categories: assets, liabilities, equity, expenses, and revenue.
Ledger accounts can include:
- Accounts Receivable
- Accounts Payable
- Sales, Income, and Revenue
- Interest Income
- Dividends
- Cash on Hand
- Inventory
- Debt
- Expenses
- Depreciation
- Taxes
- and truly so much more.
The type of accounts that will appear in your ledger will depend on the type of business you run (i.e. service-driven vs. product-driven), the scale of your company, and your operating processes.
How does a general ledger work with double entry accounting?
Double entry accounting is a practice that views each transaction as having two sides. Those two sides are typically considered a credit and a debit, which impacts an asset sheet and liabilities sheet (there’s much more detail that goes into it, but this is a simple starting point).
In double entry accounting, for every transaction a debit and credit is made from each account, which is then reflected in your general ledger.
General ledger to trial balance
A trial balance is the current final balance of each account. While your ledger will be pages and pages long, the trial balance is simply the totals for each account. A trial balance lists the closing balance from your ledger accounts (shown as either a credit or a debit).
Your trial balance is usually calculated at the end of an accounting period (commonly monthly, quarterly, and yearly). This helps your company understand whether you are operating at a positive or negative.
Accounting balance sheet vs. general ledger
While they contain similar information, an accounting balance sheet and a general ledger are very different. While a general ledger includes detailed history for all accounts and a running record of transactions, an accounting balance sheet offers less detail and is used to show what a company owns and owes.
An accounting balance sheet is useful for things like loan approval, and does not have as much detail, nor is it divided into multiple pages. It can be useful to show to potential investors, suppliers, government agencies, and creditors, and can be used for forecasting.
While they are different, both are incredibly important for your business.
What is a GL report (General Ledger Report)?
A General Ledger Report (commonly called a GL Report), includes account summaries, transaction details, and activity history for all of your accounts. The GL Report will list account numbers, transaction information, date, amounts, details, and notes.
This report can often be generated and customized in your accounting software.
Who is responsible for keeping the ledger?
This depends on the details of your company. Large companies may employ a General Ledger Manager or team of Ledger Managers to monitor and upkeep the ledger. For mid-sized companies with in-house accounting teams, this typically falls under the role of a bookkeeper or accountant. For small and many mid-sized businesses, an outsourced CPA or bookkeeping team is hired to manage the ledger and ensure the following of best practices.
Putting it to Use
Now that you know a little bit about how ledgers work, you’re ready to take action.
What is the best accounting software for general ledgers?
There are an overwhelming number of options when it comes to accounting softwares that include general ledger, ranging from Oracle’s NetSuit which is used by large firms to Xero, which is used by sole proprietors.
Quickbooks is considered the standard by many accountants, but there are literally hundreds of options for accounting software.
Where can I find a bookkeeping ledger templates?
There are many bookkeeping ledger templates and examples floating around the internet, however, it’s important to remember that many of these are simplified, may not be applicable to the financial structure of your business, and they can lead you into the error-prone activity of DIY bookkeeping.
Rather than looking for a template, we recommend speaking with your CPA, or consulting with a bookkeeping firm to get your ledger set up and running accurately from the get-go. We often get asked about Bookkeeping Cleanups, even from companies using Quickbooks.
This is too complicated. Where can I find a bookkeeper?
If you’re overwhelmed, don’t worry! Luckily, there are many qualified bookkeepers and Certified Public Accountants who offer ledger management as part of their services. You can learn more about our services here: Accounting and Bookkeeping Services, and our leadership staff.
Be sure to check reviews and select an accountant who is competent, offers the services you need, and you are comfortable working with.
