What is a General Ledger?

Blog post

A general ledger is a record of a company’s income, expenses, assets, liabilities, and equities. In most cases, a general ledger is broken down into accounts, account balances, and financial transactions and sometimes further broken down into sub-ledgers. The number of categories and sub-ledgers in use will depend on your company’s financial structure.

What’s Included in the General Ledger?

Within the general ledger are categories that enable the systematic tracking and management of various types of financial data, including:

  • Assets: Company-owned resources such as buildings, vehicles, and equipment, as well as cash on hand and accounts receivable.
  • Liabilities: Financial obligations and debts including accounts payable, outstanding loans, bonds, and other financial commitments.
  • Operating revenue: Income generated by a company’s operations, such as retail sales or fees generated by business services.
  • Operating expenses: All costs incurred during the performance of the company’s operations including salaries, energy usage, equipment repairs, and more.
  • Non-operating revenue: Investment income, income raised from the selling of assets, and more.
  • Non-operating expenses: These may include interest payments, legal fees, injury settlements, or losses incurred during restructuring.

The Primary Functions of the General Ledger

The role of the general ledger goes beyond simple bookkeeping and helps ensure the financial integrity of the operation at every level. The following represent the primary functions of the general ledger.

  • Creating an accurate record of financial transactions

    • Every financial transaction by the business finds its way onto the general ledger. That includes sales, payments, fees, and more. Within the general ledger, all these transactions are accounted for in a systematic and chronological fashion, creating a data-driven foundation on which to base other reports, projections, and analyses.

  • Consolidating accounting data

    • All accounting data is consolidated within the general ledger, making it a type of one-stop shop for financial information and eliminating the need to sift through various records to find information. Because of its importance, there are typically robust safeguards governing who has access to the general ledger and who is authorized to make alterations.

  • Facilitating compliance activities

    • The general ledger typically represents the fallback data source for auditors and others tasked with ensuring regulatory compliance. The detailed and transparent records within the general ledger make auditing and compliance with tax and accounting standards, a faster, more reliable process.

  • Facilitating the production of financial statements

    • The general ledger is vital in helping to facilitate income statements, cash flow statements, and balance sheets.

How the General Ledger is Updated and Maintained

Because of the central role the general ledger plays in ensuring the financial integrity of a business, there are well-established procedures in place governing its updating and maintenance. These include:

  • Journal entries: The journal entry is the initial recording of a transaction in the accounting system. Each entry includes a date, the accounts affected by the entry, the amount of the transaction, and a description. Journal entries form a chronological record of all company transactions and provide the basis for further accounting activities, including posting to the general ledger.

  • Posting to the general ledger: Once a journal entry has been made, the next step is to transfer it to the proper accounting category within the general ledger. Posting ensures the general ledger remains accurate and up to date.

  • Creating a trial balance: The primary goal of the trial balance is to ensure that total credits equal total debits in the general ledger. This is done by listing all ledger accounts along with their respective credit or debit balances at a specific time. Discrepancies in the trial balance typically indicate errors in journaling or posting and may suggest fraudulent activity.

  • Entry adjustments: Some transactions, like accrued expenses, may require adjustment after the fact to accurately reflect their economic impact. Prepaid revenues are another form of transaction that typically requires later adjustment in the general ledger. All such adjustments must be made in strict accordance with established accounting principles.

The general ledger is an ongoing record of a company’s income, expenses, assets, liabilities, and more. It is the wellspring of financial forecasts, projections, and financial statements and is crucial for satisfying investors, facilitating audits, and ensuring tax and regulatory compliance.