If individual assets and accounts are trees, the general ledger is the forest. It’s a finance team’s master document that shows all of the business’ transactions—accounts payable and receivable, cash on hand, capital assets, inventory, investments, liabilities, equity and more.
The technology underpinning the general ledger has come a long way from the iconic leather-bound book with rows of neatly scribed figures. Here’s why finance teams should revisit the role of the GL, best practices to break out of the static ledger mold in favor of a dynamic model and ways to draw out new insights that can inform business strategy in a fast-moving world.
What Is a General Ledger (GL)?
While the ways finance teams collect financial information have changed, the definition remains the same. A general ledger is a record of all of a company’s, and its subsidiaries’, assets, liabilities, expenses, income and equities. General ledgers are generally broken down into records of accounts and account balances and financial transactions and from there, if necessary, into subledgers. How many categories and subledgers are used depends on the complexity of the company’s financial structure.
- Without accurate information in the ledger, all other accounting processes and their outcomes are suspect.
- A well-kept general ledger is the foundation of good accounting practices.
- While keeping a GL accurate and up-to-date takes effort, the return is real-time insights for the business.
General Ledger Explained
The general ledger summarizes a company’s financial position. It’s the single, agreed-upon record of data for accounting teams tasked with ensuring the books balance, providing status updates on the company’s cash position, recording the information needed for financial statements and kicking off audit trails.
Auditors must be able to follow transactions from the general ledger to subledgers to source documentation, such as invoices or account statements.
How a General Ledger Works
In paper-based accounting, transactions were recorded in various journals. These journal entries were then summarized and the totals copied, or posted, to the general ledger.
The chart of accounts provides a framework for organizing financial data in the general ledger. Transactions recorded in the GL include account codes that provide additional information, such as whether the transaction relates to assets, liabilities, equity, expenses or revenue.
General ledgers rely on double-entry accounting—whereby every transaction must credit one account and debit another. To check that debits match credits, a trial balance is performed. Accounting software automates the recording of transactions in the journal and then posting to the general ledger—the trial balance report is then used to check for errors and help in producing financial statements.
What Is Included in a General Ledger?
Remember that the general ledger is the central repository of all financial transactions. Each entry includes the date, a description of the transaction, the general ledger code to post the journal entry to a specific account, the amount debited and credited, and the balance.
Each account in the chart of accounts has its own ledger or subledger account where all transactions impacting that account are listed. For instance, companies may have an accounts payable subledger that flows into the general ledger liabilities account.
What Does a General Ledger Tell You?
The general ledger provides a summary of the financial health of the business. Its contents are used to generate financial statements—with the liabilities, equity and assets being reflected on the balance sheet, and revenue and expenses on the income statement. Modern general ledger software can automate reporting for management and financial reporting. It also provides the detailed information needed to analyze an anomaly in the business and historical transactional data to use in annual budgeting processes.
Why are General Ledgers Important?
Accurate, complete data is absolutely essential to creating the financial forecasts, projections and statements that business and finance leaders, funders, potential buyers, auditors and other stakeholders depend on to analyze the health of the organization.
In case of discrepancies, a general ledger enables an auditor or accountant to drill down into individual journal entries to find the source of the problem.
General Ledger Example
General ledgers are based on double-entry bookkeeping, where each transaction is recorded as both a debit and a credit; this method minimizes accounting errors by logging every financial transaction twice and checking that these accounts always equal one another.
A basic journal entry post to the general ledger for a $500 transaction for office supplies would look like this:
|Feb. 1||Expense||Office supplies||#5000||$100|
4 Reasons Why You Need a General Ledger
Businesses with solid record-keeping practices are better able to provide insights into their financial status and will likely enjoy a higher valuation and easier audits. A complete general ledger is a foundational element of accounting.
- Financial transaction accuracy: A general ledger is used to record transactions and statistical data for a business, and some systems with unified data models connect those transaction details to information about customers, orders and inventory. Tracking this information helps plan business needs such as inventory purchases, how to price products and how the business will finance those needs.
- Balancing books: Above all, a general ledger ensures that the books balance. The trial balance makes sure accountants can spot any mistakes and fix them, as well as catch fraudulent activities before they become major issues.
- Ease of filing taxes: Good bookkeeping is essential to making sure the business is making payments for business licenses and insurance necessary for tax compliance. It makes sure all financial information is correct for accurate financial statements that enable the business to make financial projections and plan. It gives the business the detailed information needed for tax purposes and a paper trail in the case of an IRS audit.
- Identifying and stopping fraud: Keeping good financial records helps the business identify fraudulent transactions and remedy them before they become major issues.
What is the General Ledger Process?
- Create general ledger: Set up the general ledger according to the company’s chart of accounts.
- Create journal entry or log of business transaction details as each transaction occurs: This includes the date, the account and the amount debited, the account and the amount credited, and a description of the transaction.
- Categorize each transaction under a relevant account such as sales, cash, AP: Each journal entry rolls up under the charts of accounts used by the company, and they’re grouped under the general ledger account types of assets, liabilities, equity, revenue and/or expenses.
- Reconcile information: The bookkeeper prepares a trial balance to make sure debits equal credits. If the numbers are off, the finance team must go back into the log or journal to find and fix the error and prepare the adjusted trial balance.
- Transfer journal entries to general ledger: Once verified for accuracy, the journal entry is posted to the general ledger.
5 Steps in the General Ledger Reconciliation Process
General ledger reconciliation is a key part of closing the books. Accounting teams must regularly verify that GL entries are accurate by reconciling account balances with supporting documents, such as monthly bank statements.
Reconcile the general ledger on a regular basis so that errors don’t compound, following steps to reconcile the general ledger at the account level:
- Match the beginning balance in the account to the ending reconciliation detail from the prior period.
- Match transactions within accounts to the individual transactions.
- Review any adjusting journal entries. Corporate Finance Institute says these adjustments are made for accruals and deferrals, as well as estimates or to correct accounting mistakes.
- Review reversing entries and make sure they are correct.
- Make sure that the ending detail for the account matches the ending account balance.
General Ledgers and Double-Entry Accounting
The general ledger, when completed manually, requires double-entry accounting. This means that every transaction must credit one account and debit another. Accounting software should automatically post debits and credits to the correct accounts and update account balances in real time.
Double-entry accounting means transactions must be recorded in two accounts and that the amounts entered as debits must be equal to the amounts entered as credits.
Using the example in the table, above, when the business purchased $100 in office supplies, it debited its office supplies account under expenses and credited its checking accounting under assets. Debits must always equal credits.
Using General Ledger Codes
What is a GL code?
Each journal entry posted to the general ledger uses a GL code or account number to group items.
General ledger codes are unique numbers, letters or a combination of numbers and letters assigned to each account in a given chart of accounts. Even a small business may have hundreds of GL codes, and codes make it less likely that entries will be assigned to the wrong account. Account names are often associated with account numbers. For example, assets may be assigned separate number codes in the 1,000 range, liabilities in the 2,000 range, equity 3,000, income 4,000 and expenses 5,000. Accounts are often numbered in the order in which they can be turned into cash or will come due.
In accounting, expenses and assets are increased by debits and decreased by credits. Liabilities, equity and revenue are increased by credits and decreased by debits. For instance, the business spends $100 in office supplies, it is increasing its office supplies, so it debits that expense account by $100. To purchase the supplies the business uses an asset—cash from its checking account. It is decreasing that amount in that account by $100 so it credits that account by $100.
Companies that use accounting software may be able to consolidate active subledgers, meaning there are fewer general ledger elements to reconcile.
|Feb. 1||Expense||Office supplies||#5000||$100|
Using Accounting Software with General Ledgers
Most businesses use accounting software to automate the basic processes around creating transactions and posting them to the general ledger. Software helps the accounting team performing accounting tasks, such as setting up and closing accounting periods, banking tasks, journal entries and more. The system will automatically calculate debits and credits and allow you to put controls in place to make sure transactions can’t be entered that don’t meet guidelines.
Accounting software maintains all financial information and records in a single database, which guarantees data integrity, helps establish and maintain controls and makes the reconciliation process significantly faster and easier. This includes the ability to create recurring entries and allocations, run posting, reporting, translation and consolidation processes in parallel to speed up reporting time.
What is a chart of accounts?
The chart of accounts is a listing of all accounts to which transactions can be posted. There are five account types (Assets, Liabilities, Equity, Revenue & Expenses). Under each of these, there are primary accounts and subaccounts.
What’s the difference between a journal and a ledger?
A journal entry is a recording of an individual transaction. The general ledger summarizes transaction totals by account.
With sound general ledger accounting practices, the business sets itself up for greater efficiency in many accounting processes. It makes sure the finance and accounting team is ready when the business asks for accounts payable or accounts receivable aging reports, wants to view the cash position or wants to analyze how budgeted items are matching to actual spending.
What’s more, the general ledger is a part of the accounting process that can benefit greatly from technologies. For instance, robotic process automation can reduce tedious manual processes, increase the accuracy from the transaction level up through posting to the general ledger, and decrease risk borne of errors and noncompliance.
Processes involved are ensuring closing readiness, close sub-ledgers, manage intercompany accounting and transfer pricing, execute general ledger accounting and close, reconcile accounts, prepare financial statements, perform management review and calculate income tax provisions.