The general ledger has been around since the days when the abacus was cutting-edge. But while computers have mostly phased out beads, the general ledger is still important today.
That’s because all of your company’s financial reports—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) summarizes all the financial information you have about your business.
In the past, the general ledger was literally a ledger—a large book where financial data was recorded by hand. It’s still possible to do your bookkeeping with a paper ledger. But, since doing bookkeeping by hand takes 1,000 times longer, most business owners and bookkeepers handle general ledger tasks on their computers.
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.
The different types of general ledger account
The money your business earns and spends is organized into sub-ledgers, or general ledger accounts. They’re like notebooks where you 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 subsidiary 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 two good reasons why the GL (as all the hip accountants call it) 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 having to comb through your bank statements, credit statements, and invoices when looking for one transaction, you can just check the general ledger and see your accounting records all in one place.
The general ledger and double-entry bookkeeping
Double entry bookkeeping is the most common accounting systems for small businesses. It’s a way of managing your day-to-day transactions, with built-in error checking. Every business transaction is recorded twice—once as a 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 be equal to 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 transactions per month.
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 regularly prepare trial balances.
By preparing a trial balance, you make sure your accounting is correct before you create 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. 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 financial report. It’s only meant for internal use, in the process of creating reports for your business.
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 books are out of balance 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, it can be difficult keeping your ledger organized. That’s where GL codes come in.
By assigning a code to each type of transaction, you can easily search your ledger. These codes are arbitrary—you set them yourself. For instance, many business owners, when they do their own books, assign revenue sub-ledgers numbers starting at 100, and expense sub-ledgers codes starting at 200.
For 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|
In this example, all purchases of puppet-making materials 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.
It’s important to note that, even though you may use codes, you should still include a description of each transaction in your records. In case you pass on your books 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 so much something you use, as it is a 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 third that generates an income statement based on what you enter in the GL.
This 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.