That’s because all of your company’s financial reporting—including its balance sheet—are prepared using information in the general ledger.
Here’s what you need to know about this stalwart of business bookkeeping.
What is the general ledger?
The general ledger (also called a general journal or GL) summarizes all the financial information you have about your business. It lists every accounting transaction for you to review.
In the past, the general ledger was literally a ledger—a large book where financial data was recorded by hand. Of course, it’s still possible to do your bookkeeping with a paper ledger. But since bookkeeping by hand takes 1,000 times longer, most business owners and bookkeepers use accounting software to build their general ledgers.
A general ledger example in action
Here’s a very simple example of a general ledger, using the single-entry bookkeeping system (more on that later).
In this example, we’re looking at one month in the general ledger of an Etsy store that sells personalized hand puppets:
|Nov. 1, 2019||Equity||Starting balance for the month||$3,190|
|Nov. 3, 2019||Web Hosting||Monthly bill||($12.00)|
|Nov. 9, 2019||Sales Revenue||Etsy sales||$45.00|
|Nov. 10, 2019||Material Expense||Googly eyes||($64.00)|
|Nov. 16, 2019||Advertising Expense||Instagram ads||($120)|
|Nov. 20, 2019||Sales Revenue||Etsy Sales||$100.00|
|Nov. 24, 2019||Material Expense||Fabric||$90.00|
|Nov. 30, 2019||Equity||Closing balance for the month||$3,425|
Amounts in brackets are expenses—reductions in equity. All other transactions are revenue.
Using the information above, you can create an income statement or balance sheet for your business. Your income statement tracks your income, while your balance sheet tells you how much money you have and owe.
The different types of general ledger account
The money your business earns and spends is organized into subsidiary ledgers (also called sub-ledgers, or general ledger accounts). Sub-ledgers are like notebooks you use to write down business transactions as they happen. Then, you summarize that information in a master notebook—the general ledger.
Here are some examples of common sub-ledgers:
- Accounts receivable: money owed to your business—an asset account
- Accounts payable: money your business owes—an expense account
- Cash: liquid assets your company owns, including owners’ equity—an equity account
- Inventory: sales or purchases affecting your inventory—an asset account
The sub-ledgers you use will depend on what type of business you run. When you hire a bookkeeper who understands your industry, they’re able to set up your books using sub-ledgers that make sense for you.
As a supplement to the general ledger, your chart of accounts lists the account names and purposes of all your sub-ledgers.
Why the general ledger matters
There are three good reasons why the GL matters.
1. It’s how you get financial statements
Financial statements help you track your business’s financial performance and cash flow. They draw on data compiled in the general ledger.
There are three core types of financial statements useful to small business owners: the income statement, the balance sheet, and the cash flow statement. The general ledger matters because financial statements matter.
2. You need it to file your taxes
You (or your accountant) need to refer to the general ledger in order to file your taxes. For instance, if you’re filing a Form 1099 for a contractor, you need to know how much you paid them during the financial year.
In that case, checking your invoices against the general ledger will ensure you’re preparing the Form 1099 for them correctly.
3. It gives you one place to view all your transactions
When you record a financial transaction, it’s called a journal entry, because bookkeeping has always been done by hand, in journals. Change is hard, so we still call them journal entries today.
The general ledger is where you can see every journal entry ever made. 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.
The general ledger and double-entry bookkeeping
Double-entry bookkeeping is the most common accounting system for small businesses. It’s a way of managing your day-to-day transactions and stay on top of possible accounting errors. Every business transaction is recorded twice—once as money leaving an account (a credit) and again as money entering an account (a debit).
The term “balance the books” comes from double-entry bookkeeping. To maintain financial health, your total debit balances must equal your total credit balances.
When you set up your general ledger, you must decide whether you’ll use the double-entry method or the single-entry method. The latter is less common and suited to smaller, simpler businesses without many monthly transactions.
For a step-by-step introduction, see our (relatively painless) guide to double-entry accounting.
Double-entry trial balances
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.
By preparing a trial balance, you make sure your accounting is correct before creating financial statements for the accounting period in question. The trial balance tallies all your debits and credits for the accounting period and makes sure they match up.
If there’s an error and your books are out of balance, you’ll need to go back to make changes and create an adjusted trial balance or adjusting entries. Then, you can use it to prepare financial statements.
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.
The accounting equation
Bookkeepers and accountants use a handy little formula to illustrate what your books should
Assets = Liabilities + Equity
If the assets you have recorded don’t equal the value of your equity plus liabilities, your account balances don’t match and need to be corrected.
No matter which accounting method you use for your business, keep this equation top of mind. It tells you everything you need to know about what healthy books look like.
Using general ledger codes
If you’re recording a large number of transactions every month, keeping your ledger organized can get tricky. That’s where general ledger codes, or GL codes, come in.
When you assign a code to each type of transaction, searching your ledger becomes much easier. These codes are arbitrary—you set them yourself. 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.
Here’s an example using our simple general ledger from above:
|Nov. 1, 2019||101||Equity||Starting balance for the month||$3,190|
|Nov. 3, 2019||203||Web Hosting||Monthly bill||($12.00)|
|Nov. 9, 2019||103||Sales Revenue||Etsy sales||$45.00|
|Nov. 10, 2019||205||Material Expense||Googly eyes||($64.00)|
|Nov. 16, 2019||207||Advertising Expense||Instagram ads||($120)|
|Nov. 20, 2019||103||Sales Revenue||Etsy Sales||$100.00|
|Nov. 24, 2019||205||Material Expense||Fabric||$90.00|
|Nov. 30, 2019||102||Equity||Closing balance for the month||$3,425|
These codes are sometimes called an “account number.” In this example, all puppet-making-material purchases are coded 205, all sales revenue is coded 103, and so on. If you’re ever unsure what a certain code means, you can check back to your chart of accounts.
Even when using codes, your records should still include a description of each transaction. Then, even if you pass your books on to an accountant or bookkeeper, the descriptions will help them track what’s what.
How you access the general ledger
If you do your bookkeeping in Excel, your general ledger is where you record your journal entries.
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).
And if you work with a professional bookkeeper (like Bench), good news! You don’t need to ever think about the general ledger. They’ll do that for you. And your bookkeeper can always walk you through your GL if you have questions. Just know that when your bookkeeper prepares financial statements for you, they’re pulling from the general ledger.
Create your own general ledger with a template
For basic bookkeeping needs, the Bench Income Statement Template does the trick as a general ledger.
It includes three pages: One for your chart of accounts, another for a single-entry general ledger, and a third that generates an income statement based on what you enter in the GL.
This template gives you everything you need to set up a simple, single-entry accounting system for your business. 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.
In that case, to get the job done—creating a chart of accounts, creating trial balances, and producing monthly financial reports—you should consider talking to a bookkeeper.
To see how a professional team handles your general ledger, get an inside look at how Bench does your bookkeeping.