General Ledger

We go over everything you need to understand the fundamentals of General Ledger!
Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: March 7, 2022
Date Published: November 3, 2021

What is a General Ledger?

Simply stated, a general ledger is a record keeping system of a company’s financial data.

A General Ledger is where all debits and credits are listed that have taken place during the operating life of a company.

It is through the Trial Balance that the entries posted against each debit and credit are validated.

The financial statements of a company are made using the information that is recorded on the trial balance.

Transactions listed on the General Ledger are separated into respective accounts for Assets, Liabilities, Owner’s Equity, Revenues and Expenses.

general ledger

How Does a General Ledger Work?

A general ledger is very important for companies to be able to provide accurate financial reports.

The entries that are created in the general ledger and subsequently posted in their sub-ledgers (as already determined in the Chart of Accounts) set the information for the Trial Balance which accountants use to check for errors.

When errors are found in the Trial Balance, the necessary adjusting entries are posted before the Financial Statements are pulled up.

The major financial statements created from the Trial Balance in order for companies to make sound financial decisions are the Income Statement, Cash Flow Statement, Balance Sheet and the Statement of Changes in Owner’s Equity.

General Ledgers and Double Entry Accounting

For every general ledger, there is always a company that employs the double entry system of accounting.

A double entry system basically means that for every debit transaction, there is always an equal credit transaction.

These double entries are called journal entries where debits are posted on the left side of the column, and the credits are posted on the left.

The accounting equation is as follows:

Assets – Liabilities = Stockholders’ Equity

This is the basis for each journal entry – that each debit must equal a credit and in the posting of these entries, it goes to the Balance Sheet that follows exactly the format of the accounting equation.

Even when a different accounting equation is used such as Assets = Liabilities + Stockholders’ Equity, the debit and credit must still balance.

What a General Ledger Tells Us

The general ledger is the point to which all details of each account are found.

For every line item in the general ledger, it is posted to the Trial Balance and the other financial statements such as the Income Statement, Balance Sheet, Statement of Cash Flows, and other financial statements.

These financial statements will only be able to give stakeholders a high level view of the financial performance and position of the company at any point in time.

In case these stakeholders wish to look deeper into each account, they would have to look at the general ledger to see complete information on transactions.

This is when errors are found and then corrected with an adjusting journal entry.

Looking at general ledger transactions can sometimes mean looking at each and every journal entry made.

This can be necessary to ensure that the financial reports are accurate and dependable.

What is a general ledger

General Ledger Examples

Balance Sheet Transaction

As discussed above, the general ledger transactions directly impact the major financial statements and one of those is the Balance Sheet.

For example, let’s say the owner of a sole proprietorship business added capital to the business entity of $100,000.

A journal entry for this event would be a debit of Cash for $100,000 and a credit to Owner’s Equity for $100,000.

This journal entry has an equal debit and credit – the cash is increased for $100,000 and the owner’s equity is also increased for $100,000.

Income Statement Transaction

To be able to effectively show the effect of general ledger to the income statement, this is the basic income statement formula:

Net Income = Revenue – Expenses

The usual journal entry transaction typically affects both the balance sheet and income statement.

For example, a company sold its product on credit for $250.

To make a journal entry of the transaction, A debit to Accounts Receivable (Balance Sheet account) increases by $250 and a credit to Sales (An Income Statement account) also increases by $250.

Another example would be to pay for utilities in cash for $300.

The journal entry for this would be a debit to Utilities Expense (An Income Statement account) for $300 and a credit to Cash for $300 (A Balance Sheet account).

For both entries, the debits and credits are equal and thus, the Trial Balance stays in balance.

The Purpose of the General Ledger

The General Ledger is considered to be the storehouse of every company’s financial transactions.

These transactions are permanently kept there which means that at any point in time, when a company wants to check for accounting related information, it is readily available in the General Ledger.

From the General Ledger, transactions are organized into different accounts that fall under permanent accounts (Balance Sheet accounts) such as assets, liabilities and stockholders’ equity, and nominal accounts (Income Statement accounts) such as revenues and expenses.

The Trial Balance is prepared once sub-ledgers are closed and it is from the Trial Balance that financial statements are prepared.

Is the General Ledger Part of Double-Entry Bookkeeping?

In the double entry bookkeeping system, every company will also employ the General Ledger method where every journal entry of debit has a corresponding credit of the same amount.

They must always balance.

It is in the double entry bookkeeping that the accounting equation is based on:

Assets + Liabilities = Stockholders’ Equity

General Ledger Entry Example

To better illustrate the debits and credits for each accounting entry, most accountants post entries into a T Account.

The debits are posted on the left hand side of the T Account and the credits are posted on the right hand side of the T Account.

For example, a company purchases supplies on credit for $500.

The accounts affected in this transaction are the Supplies Expense and the Accounts Payable.

The Expense account increases by a debit of $500 and the Accounts Payable account increases by a credit account of $500.

This makes the accounting equation remain in balance because of the equal amount of debit and credit passed.

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  1. Duke University "General Ledger Account Definitions" Page 1 . November 3, 2021

  2. Harvard University " General Ledger " Page 1 . November 3, 2021

  3. MIT " General Ledger (G/L) Accounts" Page 1 . November 3, 2021