General Ledger: The Foundation of Good Accounting (2024)

If individual assets and accounts are trees, the general ledger is the forest. It’s afinanceteam’s master document that shows all of the business’transactions—accountspayable andreceivable, cash on hand, capital assets, inventory, investments, liabilities, equity andmore.

The technology underpinning the general ledger has come a long way from the iconicleather-bound book with rows of neatly scribed figures. Here’s why finance teamsshouldrevisit the role of the GL, best practices to break out of the static ledger mold in favorof a dynamic model and ways to draw out new insights that can inform business strategy in afast-moving world.

What Is a General Ledger (GL)?

Ageneral 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 intorecords of accounts and account balances and financial transactions and from there, ifnecessary, into subledgers. How many categories and subledgers are used depends on thecomplexity of the company’s financial structure.

Key Takeaways

• Without accurate information in the ledger, all other accounting processes and theiroutcomes 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-timeinsights for the business.

General Ledger Explained

The general ledger summarizes a company’s financial position. It’s the single,agreed-uponrecord of data for accounting teams tasked with ensuring the books balance, providing statusupdates on the company’s cash position, recording the information needed for financialstatements and kicking off audit trails.

Importance of the General Ledger in Accounting

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 downinto individual journal entries to find the source of the problem.

Components of a General Ledger

A comprehensive understanding of the financial ecosystem of an organization necessitates adeep dive into the components of its general ledger. The GL possesses several integralelements that contribute to how thorough and comprehensive it is. Here's a structuredexploration of the primary components:

Types of Accounts in the General Ledger

Within the general ledger, accounts are categorized to systematically track and managefinancial data. Here are the principal types of accounts in the general ledger:

• Asset Accounts:These represent resources owned by the companywhich have future economic value. Examples include cash, accounts receivable, inventory,and tangible assets like buildings and equipment.
• Liability Accounts:These are the obligations or debts that acompany owes to other businesses. Common liabilities include accounts payable, loans,bonds, and other financial commitments.
• Equity Accounts:These accounts provide insights into theownership interest of shareholders. Common equity accounts include common stock,retained earnings, and additional paid-in capital.
• Operating Revenue Accounts:These capture the income generatedfrom the company’s primary operations, like sales or service fees. Revenueaccounts giveinsights into business activities that drive earnings.
• Operating Expense Accounts:These record all costs incurred duringoperations. This includes salaries, rent, utilities, depreciation, and other operationalexpenses.
• Non-Operating Revenue Accounts:These are revenues earned by abusiness outside of its main or operations, like investment income or gains from sellingequipment.
• Non-Operating Expense and Loss Accounts:Like non-operatingrevenues, non-operating expenses are business expenses not related to a company’scoreoperations. Examples of this type of account would be interest payments or otherone-time losses from activities like restructuring or charges on obsolete inventory.

These account categories form the foundation of a company’s critical financialstatements.The balance sheet holds the assets, liabilities, and equity, while the income statementaccounts include operating revenues and expenses as well as the non-operating revenues andexpenses.

Debits and Credits and the Double-Entry System

The entire structure of the modern accounting system is built on the idea of debits andcredits. To understand the complexities of the general ledger, businesses must have a firmgrasp of these two components and how they establish a sort of financial balance. At themost basic level, debits and credits are just the left and right sides of a transaction.They serve as the accounting language, dictating how transactions adjust accounts within thegeneral ledger.

The genius of the double-entry system lies in its self-balancing nature. For everytransaction, the total debits must equal the total credits, ensuring that the accountingequation (Assets = Liabilities + Equity) remains in balance. This dual-entry acts as acheck-and-balance mechanism, minimizing errors and maintaining the integrity of thefinancial data.

Every transaction that a business undergoes will find its way into the general ledger throughthe lens of debits and credits. Entries in the GL start as journal entries, which, whenposted, affect the balances of the respective accounts. Over time, the accumulation of thesedebit and credit entries shapes the financial narratives portrayed in financial statements.

Account Balances

The account balance represents the net value in an account at any given point in time. It'sderived from the total debits and credits applied to that account since its inception or thestart of a financial period. If debits exceed credits in a particular account, it has a"debit balance." Conversely, if credits surpass debits, it has a "credit balance." Accountbalances are indispensable when crafting financial statements. The balance sheet, forinstance, is a direct representation of the balances in asset, liability, and equityaccounts. Similarly, the income statement is constructed from the balances in revenue andexpense accounts.

Analyzing account balances aids stakeholders in gauging the financial health, liquidity, andperformance of an organization. For instance, a dwindling cash account balance might signalpotential liquidity issues, while steadily increasing revenue account balances couldindicate robust business growth.

Periodic reconciliation of account balances, especially key accounts like cash, is essential.This process ensures that the recorded balances align with external records (like bankstatements) and are free from errors or discrepancies.

Auditors extensively review account balances as part of their assurance processes. Theyassess the accuracy, compliance, and legitimacy of the balances, ensuring they've beenreported in line with accounting standards and principles.

Chart of Accounts

Closely intertwined with the general ledger, the Chart of Accounts serves as the structuralframework that classifies, organizes, and displays the myriad financial accounts thatencapsulate a business's financial transactions and positions.

Essentially, the CoA is a categorized list of all ledger accounts that a business utilizes inits operations. It’s the blueprint that guides the recording of transactions in thegeneral ledger. Each account within the chart has a unique identifier, often numerical, tofacilitate quick referencing and data management.

Typically, a CoA is segmented based on the nature of accounts, starting from assets,liabilities, and equity to revenues and expenses. These main categories can further branchinto subcategories, like current assets, long-term liabilities, etc. Within thesecategories, individual accounts are listed, such as cash, accounts receivable, common stock,sales revenue, or rent expense.

The CoA and the GL are inseparable in many ways. While the CoA provides the structuredlisting of accounts, the GL contains the actual debit and credit transaction entriescorresponding to these accounts. Together, they form the complete picture of a business'sfinancial activities and positions.

4 Main Function of the General Ledger

The general ledger performs a myriad of functions, each vital to the accurate and efficientfinancial management of an organization. Its role transcends mere record-keeping; it's thelinchpin that ensures the financial soundness of an entity.

Recording All Financial Transactions

Every financial activity, whether it's a purchase, sale, payment, or receipt, finds its wayinto the GL. It chronologically and systematically captures these transactions, ensuringnone slip through the cracks. By documenting every monetary move, the GL provides the rawdata that becomes the bedrock for subsequent accounting analyses and reports.

Serving as a Central Repository for Accounting Data

The GL consolidates all financial data, eliminating the need to sift through disparaterecords. It streamlines information access and simplifies financial review processes. Givenits central role, the GL is typically designed with robust safeguards to preventunauthorized alterations, ensuring the purity and reliability of financial data.

Facilitating the Creation of Financial Statements

• Income Statement: By collating revenue and expense accounts, the GLaids in determining an entity's profitability over a specific period.
• Balance Sheet: The GL's asset, liability, and equity account balancesare synthesized to produce a snapshot of an organization's financial position at a givenpoint in time.
• Statement of Cash Flows: By tracking cash-related transactions, the GLfacilitates the creation of this statement, outlining the cash inflows and outflows fromoperating, investing, and financing activities.

Assisting in Audit and Compliance Activities

With its detailed and transparent record of transactions, the GL serves as a primaryreference for auditors, making the audit process more efficient and precise. For manyentities, especially those in regulated sectors, the GL ensures that financial data ismaintained in adherence to specific standards, aiding in compliance with legal andregulatory mandates.

The general ledger, while an accounting mainstay, is more than just a ledger. It's thefinancial compass of a business, directing and informing a multitude of financial processesand decisions. By diligently performing its diverse functions, the GL stands as anirreplaceable instrument in the orchestration of sound financial management.

How a General Ledger Works

The general ledger is an integral component of a company's accounting system, serving as thecentral repository for all financial transactions. Its effective functioning is vital foraccurate financial reporting and insightful business analysis. Here's a systematic breakdownof how a general ledger operates:

1. Recording Transactions:At the heart of the general ledger is therecording of every financial transaction made by the company. These transactions arefirst documented in journals, capturing both the debit and credit aspects, in line withthe double-entry accounting system.
2. Classifying Data: Once recorded, transactions are categorizedintospecific the accounts such as assets, liabilities, equity, revenues, and expenses. Thisclassification ensures that data is organized systematically and can be easily retrievedor analyzed.
3. Posting:After categorization, data from the journal entries istransferred or "posted" to the respective accounts in the general ledger. This processconsolidates data, giving businesses an aggregated view of each account's activity.
4. Trial Balance Preparation:Every so often, a trial balance ispulledfrom the general ledger. This step involves tallying the debit and credit entries foreach account to ensure they balance out. Any discrepancies indicate errors that need tobe fixed for accurate financial statements.
5. Adjusting Entries:At the end of a financial period, certainentriesmay need adjustments for events that haven't been recorded yet, like accrued expenses orrevenues. These adjusting entries emake certain the ledger reflects the accuratefinancial position and performance of the company.
6. Generating Financial Statements:With all transactions recorded,classified, posted, and adjusted, the general ledger provides the foundation forpreparing the company's primary financial statements:the income statement, balancesheet, and cash flow statement.
7. Audit and Review:Because it holds all of a company’sfinancialinformation, the general ledger is also a primary source of information during internalreviews and external audits. Auditors use the GL to verify the accuracy and integrity offinancial data. In essence, the general ledger ensures transparency, accuracy, andcompliance in financial reporting.

In essence, the general ledger functions as the backbone of a company's financialinfrastructure, ensuring transparency, accuracy, and compliance in financial reporting.Proper management and maintenance of the GL are paramount for any business aiming forfinancial robustness and informed decision-making.

Maintaining and Updating a General Ledger

The general ledger functions as the central repository for recording all financialtransactions for a business. Its accurate maintenance and timely updates are key to ensuringa clear and true representation of an organization's financial health.

Journal Entries

Journal entries are the initial recordings of financial transactions in the accountingsystem. Each entry typically has a date, accounts affected, amounts to be debited orcredited, and a brief description. These entries serve as a chronological record, capturingevery financial event as it occurs. They form the foundational basis from which subsequentaccounting activities, like posting to the GL, are derived.

Posting: Transferring Information from Journals to the GL

Once a transaction is journaled, the next step is to transfer (or post) these entries to therespective accounts in the GL. Posting translates individual transactions into aggregateddata, facilitating a holistic view of each account's activity and balance. This step ensuresthat the GL remains up-to-date and reflective of all business transactions.

Trial Balance: Checking for Discrepancies and Errors

A trial balance is a statement that lists down all the ledger accounts along with theirrespective debit or credit balances at a specific point in time. Its primary aim is toascertain that the total debits equal the total credits, ensuring adherence to thedouble-entry accounting principle. Any discrepancy in the trial balance can indicate errors,either in journaling or posting, necessitating a thorough review and rectification.

Adjusting Entries: Reasons and Examples

Not all financial events are immediately journaled or posted. Some transactions, like accruedexpenses or prepaid revenues, may require adjustments to reflect their true economic impactaccurately.

• Accrued Expenses:If a business has utilized services (likeutilities)but hasn't been billed by month-end, an adjusting entry ensures that the expense isrecorded in the correct period.
• Prepaid Revenues:If a customer pays in advance for services to berendered in the future, an adjusting entry will recognize the revenue as it's earnedover time.

Adjusting entries ensure the financial statements adhere to the accrual accounting principle,representing an accurate portrayal of financial activities during a period. In essence, themeticulous process of maintaining and updating a general ledger safeguardsthe integrity and accuracy of a business's financial records. By understanding andimplementing each stage—from journaling transactions to making necessaryadjustments—businesses can ensure they produce financial statements that are bothcompliant and informative.

7 Steps in the General Ledger Reconciliation Process

General ledger reconciliation is a key part of closing the books. Accounting teams mustregularly verify that GL entries are accurate by reconciling account balances withsupporting documents, such as monthly bank statements.

It involves comparing GL account balances with external statements or independent records toidentify and resolve any discrepancies. Through this process, businesses can guarantee thattheir financial statements provide a true and fair view of their financial position.

Businesses should reconcile the general ledger on a regular basis so that errors don’tcompound, following these steps:

1. Preparation
   • Gather Data: Start by gathering all financial documents, including bankstatements, invoices, receipts, and other important external records.
   • Access the GL: Securely access the general ledger to record the balances andtransaction details for the accounts to be reconciled.
2. Comparison
   • Match Transactions: For each transaction in the external document, find itscounterpart in the general ledger. For example, when reconciling bank accounts,compare each bank statement transaction with the ledger entries.
   • Identify Discrepancies: Highlight any differences between the general ledger andexternal records -- a missing transaction, a difference in transaction values,or atransaction recorded in the wrong account.
3. Investigation
   • Analyze Disparities: Scrutinize any discrepancies to identify the underlyingcause.This might involve speaking to relevant departments or personnel or reviewingtransaction documentation.
   • Common Discrepancies: Common issues may stem from data entry errors, timingdifferences (e.g., outstanding checks in bank reconciliations), or missedtransactions. Adjustment Journal Adjusting Entries: If legitimate discrepanciesarefound that are not due to timing differences, prepare journal entries to adjusttheGL accordingly.
4. Adjustment
   • Journal Adjusting Entries: If legitimate discrepancies are found that are notdue totiming differences, prepare journal entries to adjust the GL accordingly.
   • Documentation: Ensure that any adjustments made are well-documented, providing arationale for the change and referencing any supporting evidence.
5. Verification
   • Re-run the Trial Balance: After adjusting, produce a new trial balance to ensurethat the books are still balanced (total debits equal total credits).
   • Reconfirm: Re-check the reconciled account against the external record toconfirmthat the discrepancies have been aptly addressed.
6. Documentation and Review
   • Compile Reconciliation Reports: Create detailed reports that show the initialdiscrepancies, the investigation process, adjustments made, and the finalreconciledbalances.
   • Supervisor Review: Ideally, reconciliations should be reviewed and approved by asupervisor or a different team member for an added layer of control andverification.
7. Periodic Follow-up
   • Regular Reconciliations: Depending on the nature and volume of transactions,determine the frequency of reconciliation (e.g., monthly, quarterly). Morecriticalaccounts, like cash, might require daily or weekly reconciliation.
   • Continuous Monitoring: Implement systems or tools that can flag potential issuesinreal-time, enabling timely interventions.

The general ledger reconciliation process plays a pivotal role in maintaining the financialintegrity of a business. By ensuring it accurately reflects real-world transactions andbalances, companies can instill confidence among stakeholders and comply with regulatory andaudit requirements. It's a meticulous process that, when done effectively, safeguards thebusiness against potential financial misrepresentations and inaccuracies.

7 Reasons Businesses Need a General Ledger

Businesses with solid record-keeping practices are better able to provide insights into theirfinancial status and will likely enjoy a higher valuation and easier audits. A completegeneral ledger is a foundational element of accounting.

1. Financial transaction accuracy:A general ledger is used to recordtransactions and statistical data for a business, and some systems with unified datamodels connect those transaction details to information about customers, orders andinventory. Tracking this information helps plan business needs such as inventorypurchases, how to price products and how the business will finance those needs.
2. Balancing books:Above all, a general ledger ensures that thebooks balance. The trial balance makes sure accountants can spot any mistakes and fixthem, as well as catch fraudulent activities before they become major issues.
3. Ease of filing taxes:Goodbookkeepingis essential to making sure the business is making payments forbusiness licenses and insurance necessary for tax compliance. It makes sure allfinancial information is correct for accurate financial statements that enable thebusiness to make financial projections and plan. It gives the business the detailedinformation needed for tax purposes and a paper trail in the case of an IRS audit.
4. Identifying and stopping fraud:Keeping good financial recordshelps the business identify fraudulent transactions and remedy them before they becomemajor issues.
5. Holistic financial view: The GL aggregates every financial transaction,offering a comprehensive view of the business's finances across different timeframes.It’s the source from which balance sheets are crafted, detailing assets,liabilities, and equity of a business at any given moment. Through the GL, businessescan ascertain revenue trends, cost structures, profitability metrics, and more, allowingfor a deep understanding of operational successes and challenges.
6. Strategic planning and decision-making:The general ledgerprovidesdata for businesses to grow their financial and strategic reach. Whether it's aboutlaunching a new product, scaling operations, or managing costs, the financial insightsfrom the GL play a crucial role. Businesses can also identify financial vulnerabilities,such as declining revenues or increasing liabilities, and proactively devise strategiesto mitigate them. Past financial data from the general ledger helps businesses projectfuture financial scenarios, enabling businesses to plan with greater precision.
7. Ensuring transparency and accountability:Every entry can betraced back to its origin, providing a transparent trail of all financial activities.This concept of traceability is vital during external audits and internal reviews . Manyindustries are subject to strict financial regulations, and the general ledger ensuresbusinesses adhere to such standards and can readily provide any necessary documentation.Transparent financial reporting instills confidence among investors, creditors, andother business stakeholders. It's a testament to the business's commitment toaccountability and ethical financial management.

3 General Ledger Challenges

While its significance is undeniable, the management of a GL is not without its challenges.In an ever-evolving business landscape, finance professionals grapple with a range ofobstacles that can affect the accuracy and reliability of this crucial accounting tool. Thissection offers an in-depth exploration of the predominant challenges in GL management:

1. Human Errors and Oversight

   Even the most diligent professionals are susceptible to human error. Mistypedfigures, omitted entries, or misclassified transactions can compromise the integrityof the ledger. Regular reviews and reconciliations are part and parcel of GLmanagement. However, overlooking anomalies or misinterpreting data can lead tofinancial discrepancies.

2. Complex Transactions and Accounting Standards

   Accounting standards, both domestic and international, are continuously evolving.Staying abreast of these changes and ensuring the GL aligns with them can bechallenging. Certain transactions, like mergers, acquisitions, or foreign exchange,can be intricate. Properly accounting for such complexities in the GL demandsexpertise and meticulous attention to detail.

3. Potential for Fraud and Misuse

   Unfortunately, the possibility of internal fraud, be it through manipulated entriesor unauthorized transactions, is a real concern. Such actions can distort the GL'saccuracy and erode stakeholder trust. Inadequate security protocols or accesscontrols can leave the GL vulnerable to external threats and misuse.

Navigating the challenges of managing a general ledger requires a blend of expertise,vigilance, and technological support. By recognizing and addressing these potential pitfallsproactively, organizations can safeguard the integrity of their financial records, ensuringthat the GL remains a dependable pillar of their financial architecture.

Basic General Ledger Example

General ledgers are based ondouble-entrybookkeeping, where each transaction is recorded as both a debit and a credit; thismethod minimizes accounting errors by logging every financial transaction twice and checkingthat these accounts always equal one another.

A basic journal entry post to the general ledger for a $100 transaction for office supplieswould look like this:

Using NetSuite’s Accounting Software with General Ledgers

Most businesses use accounting software to automate the basic processes around creatingtransactions and posting them to the general ledger. Software helps the accounting teamperforming accounting tasks, such as setting up and closing accounting periods, bankingtasks, journal entries and more. The system will automatically calculate debits and creditsand allow you to put controls in place to make sure transactions can’t be entered thatdon’t meet guidelines.

NetSuite’s accounting software maintains all financial information and records in asingle database, which guarantees data integrity, helps establish and maintain controls andmakes the reconciliation process significantly faster and easier. This includes the abilityto create recurring entries and allocations, run posting, reporting, translation andconsolidation processes in parallel to speed up reporting time.

General Ledger FAQs

What is a chart of accounts?

The chart of accounts is a listing of all accounts to which transactions can be posted. Thereare five account types (Assets, Liabilities, Equity, Revenue & Expenses). Under each ofthese, 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 summarizestransaction totals by account.

With sound general ledger accounting practices, the business sets itself up for greaterefficiency in many accounting processes. It makes sure the finance and accounting team isready 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 toactual spending.

What’s more, the general ledger is a part of the accounting process that can benefitgreatly from technologies. For instance, robotic process automation can reduce tediousmanual processes, increase the accuracy from the transaction level up through posting to thegeneral ledger, and decrease risk borne of errors and noncompliance.

Processes involved are ensuring closing readiness, close sub-ledgers, manage intercompanyaccounting and transfer pricing, execute general ledger accounting and close, reconcileaccounts, prepare financial statements, perform management review and calculate income taxprovisions.

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 topost the journal entry to a specific account, the amount debited and credited, and thebalance.

Each account in the chart of accounts has its own ledger or subledger account where alltransactions impacting that account are listed. For instance, companies may have an accountspayable subledger that flows into the general ledger liabilities account.

What is the General Ledger Process?

1. Create general ledger:Set up the general ledger according to thecompany’s chart of accounts.
2. Create journal entry or log of business transaction details as each transactionoccurs:This includes the date, the account and the amount debited,the account and the amount credited, and a description of the transaction.
3. Categorize each transaction under a relevant account such as sales, cash,AP:Each journal entry rolls up under the charts of accounts used bythe company, and they’re grouped under the general ledger account types of assets,liabilities, equity, revenue and/or expenses.
4. Reconcile information:The bookkeeper prepares a trial balance tomake sure debits equal credits. If the numbers are off, the finance team must go backinto the log or journal to find and fix the error and prepare the adjusted trialbalance.
5. Transfer journal entries to general ledger:Once verified foraccuracy, the journal entry is posted to the general ledger.

What Does a General Ledger Tell You?

The general ledger provides a summary of the financial health of the business. Its contentsare used to generate financial statements—with the liabilities, equity and assetsbeing reflected on the balance sheet, and revenue and expenses on the income statement.Modern general ledger software can automate reporting for management and financialreporting. It also provides the detailed information needed to analyze an anomaly in thebusiness and historical transactional data to use in annual budgeting processes.

What is a GL code?

Each journal entry posted to the general ledger uses a GL code or account number to groupitems.

General ledger codes are unique numbers, letters or a combination of numbers and lettersassigned to each account in a given chart of accounts. Even a small business may havehundreds of GL codes, and codes make it less likely that entries will be assigned to thewrong account. Account names are often associated with account numbers. For example, assetsmay 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 inwhich 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. Forinstance, 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 anasset—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, meaningthere are fewer general ledger elements to reconcile.