What Is a General Ledger and How Does It Work?

Running a successful business means staying in control of a hundred different variables at a time. You're managing staff, trying to set your company apart, and ensuring financial resources are available when required. 

Sustaining healthy cash flow is fundamental to your business's financial stability. It's a common saying that you must invest money to generate revenue, so keeping a keen eye on your expenditures is vital.

This is where the importance of diligent bookkeeping comes into play. The general ledger stands as one of your most indispensable resources. this helps you maintain accurate and precise financial records. Keep reading as we dive into everything you need to know about the General Ledger (GL).

What Is a General Ledger?

You've probably heard of it, but what is general ledger accounting exactly? The general ledger is the master record of every financial transaction you make as part of your business. Every time money changes hands, there should be a record of it here.

Central to the general ledger is the chart of accounts, which organizes together every one of the different accounts for your business. Wherever the money goes, you can keep track of it here. 

You'll use a general ledger most often for double-entry bookkeeping, which means making two entries for every financial transaction you record. Each exchange affects two subsidiary ledgers in your chart. Every time you make a sale or a purchase, that business transaction should be recorded as debit and credit. 

The recording you do for each transaction is called a journal entry. Because each entry you post to the ledger shows up in both debits and credits, it should be easy to balance the accounts and make sure everything adds up later. 

General ledgers used to be documented in physical records, but digital documents are becoming more common. You could find accounting software that works for you, or you might keep everything in a spreadsheet form. 

General Ledger or a Balance Sheet?

While you may hear some people use these two terms interchangeably, a general ledger and a balance sheet are not the same. 

One of the main differences between a general ledger and a balance sheet is the scope. The general ledger is the financial record for the entire life of the business. It should include everything, all the way back to the beginning. On the other hand, the balance sheet is a financial picture of your business at a given moment in time. 

You'll use a balance sheet to show off your business's current assets and liabilities to give someone a quick understanding of where your business is right now. The general ledger includes all of that information and more.   

Why is a General Ledger Important?

A general ledger is crucial for easy and effective bookkeeping for entrepreneurs because it keeps you coordinated and in control of your company's finances. You need one place for it all to go so that you can get a sense of your financial health at a glance. 

This is important for your own decisions as a business owner about hiring, inventory purchases, growth planning, and more. But the general ledger is essential for reasons beyond your decision-making. 

Whenever you need to report on your company's situation, the general ledger will provide the information you need. Income statements and financial reports you put together will be more straightforward if your general ledger is reliable and up-to-date. This makes putting together your tax return much simpler as well. 

At the end of every quarter, you should put together a trial balance worksheet as a report of the current status of your accounts and cash flows. This lets you compare financial statements from each subsidiary ledger and ensure it all adds up. If you're always up-to-date, you won't have to do any extra work when you need to prepare a report for an investor. 

How Does a General Ledger Work?

Every business transaction finds its place in the general ledger. Each transaction is recorded in the appropriate general ledger account, following the principles of double-entry accounting.

As transactions are recorded, the general ledger continuously updates the balances of each account. Debits and credits impact the account balance differently depending on the account. 

Additionally, the general ledger serves as the foundation for financial reporting. By collecting transaction data, the ledger helps prepare key financial statements such as the balance sheet, income statement, and cash flow statement. These statements are added to a financial report that is then able to provide stakeholders with insights into the financial health and performance of a business.

Accounts Included in a General Ledger:

So what goes into your general ledger? Each of the different accounts in your chart of accounts fits into either assets or liabilities. As you balance your ledger, these accounts should fit together following the basic accounting equation: your assets are equal to your liabilities and the shareholder's equity. 

Listed below are the key accounts you should include as the core of your general ledger's chart of accounts. You'll probably recognize them as some of the most common bookkeeping terms essential for basic operation in a business. 

Accounts Receivable

Accounts receivable are debits. These are assets that represent the money you are owed. These are often orders for goods or services that have not yet been paid for. You are expecting to receive these payments, but you haven't collected them yet.  

Accounts Payable

Then there are accounts payable. This is the other side of the coin. These liabilities include all the money you owe but haven't yet paid. Whenever you make an order from your suppliers, the payment you owe will go into accounts payable until it is paid in full. 

Cash

Cash is the money you have now. This refers to all the funds you have in expense accounts ready to be spent. This is important to keep track of so that you don't end up spending money you don't have. 

Inventory

Your inventory is another essential category to record carefully. These are assets that you've paid for and are waiting to sell to your customers. You've invested money in this inventory, and you need it to pay off. 

Keeping Your Business Running Smoothly

Running a financially healthy business and creating sustainable growth requires maintaining all of these accounts, and there's no better way to do it than with a general ledger. Don't let bookkeeping fall off your list of priorities and slip through the cracks. 

As your business expands, it could be beneficial to hire an outside firm or assign an accountant or bookkeeper to maintain your company's records. The records will grow more complex as the business itself grows, and it won't help your company for the small business owner to be tied up constantly with paperwork.