In accounting, a general ledger is used to record a company’s ongoing transactions. Within a general ledger, transactional data is organized into assets, liabilities, revenues, expenses, and owner’s equity. After each sub-ledger has been closed out, the accountant prepares the trial balance. This data from the trial balance is then used to create the company’s financial statements, such as its balance sheet, income statement, statement of cash flows, and other financial reports. A general ledger represents the record-keeping system for a company’s financial data, with debit and credit account records validated by a trial balance. It provides a record of each financial transaction that takes place during the life of an operating company and holds account information that is needed to prepare the company’s financial statements.
As a supplement to the general ledger, your chart of accounts lists the account names and purposes of all your sub-ledgers. While the above accounts appear in every general ledger, other accounts may be used to track special categories, perform useful calculations and summarize groups of accounts. For example, cash and account receivables are what is a common size balance sheet part of the company’s assets. Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors.
When you assign a code to each type of transaction, searching your ledger becomes much easier. For instance, when doing their own books, many business owners assign revenue sub-ledgers numbers starting at 100 and expense sub-ledgers codes starting at 200. For this transaction, the credit column will remain unchanged for this account.
- Periodically, it’s necessary to generate a trial balance from the general ledger.
- But since bookkeeping by hand takes 1,000 times longer, most business owners and bookkeepers use accounting software to build their general ledgers.
- If a GL account includes sub-ledgers, they are called controlling accounts.
- They are sometimes broken down into departments such as sales and service, and related expenses.
A Balance Sheet Transaction Example
If you decide to research double-entry bookkeeping, you’ll probably come across the term “trial balance” often. Trial balances are a financial tool specific to double-entry bookkeeping. If you choose to set up a double-entry ledger, you should be ready to prepare trial balances regularly. To maintain financial health, your total debit balances must equal your total credit balances. Rather than combing through your bank statements, credit statements, and invoices when looking for one transaction, any stakeholder can just check the general ledger and see all accounting records in one place. In accounting, the terms debit and credit differ from their commonplace meanings.
What is a general ledger process?
A balance sheet is a statement that presents the company’s financial position at a point in time. When starting a small business, you may not know all of the important ins and outs of record keeping. A company’s GL is the basis of its financial reporting and the source of the information used therein. Transactions are noted from a source document, such as an invoice or bill, and tracked in the general journal. Periodically, all transactions made within a company are posted to the general ledger. Since the GL is comprised of a company’s total financial accounts, it is instrumental in the preparation of key financial reporting documents such as the balance sheet and income statement.
Benefits of general ledger reconciliation
It is organized in such a way that you can quickly view, and verify information. In simple words, the general ledger is a cornerstone of accounting and financial reporting. For the most part, general ledgers included with accounting software come pre-built with farmfact farm accounting software the most common account types (Figure A). Depending on the software and plan, you can also add custom accounts unique to your specific business.
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If your business is busy, and you find it hard to keep your books organized with this template, it may be time to consider double-entry bookkeeping. If you’re more of an accounting software person, the general ledger isn’t something you use but an automated report you can pull. Your software of choice will probably have an option to “View general ledger,” which will show you all the journal entries you’ve entered (for a given time frame). As a document, the trial balance exists outside of your general ledger—but it is not a stand-alone financial report. Think of your general ledger as growing the wheat before you make the bread that is your financial statements. It provides bookkeepers with the information they need to generate any reports.
A general ledger should be updated regularly, ideally as soon as a financial transaction occurs. This ensures that financial records remain accurate and up-to-date, allowing for timely decision-making and financial reporting. Most accounting software programs are pre-programmed with a general ledger and chart of accounts, including free software like Wave Accounting.
Accounting software automates some of the most tedious aspects of general ledger reconciliation, such as automatically generating journal entries and streamlining bank reconciliation. General ledger reconciliation is the process of making sure your GL is accurate. You (or your accountant) will check the transactions recorded in your general ledger against primary documents like receipts, tax documents, invoices and other records. You’ll make sure every transaction is accurate and has been correctly recorded as both a credit and debit in the appropriate accounts.