What Is A General Ledger And How To Use It

Understanding the general ledger—and a few related, straightforward concepts—lays the foundation for a deeper grasp of bookkeeping and accounting. More importantly, it helps you make sense of your business’s financial health and decisions with confidence.

What is a general ledger?

A general ledger is a master document showing a comprehensive financial record of all business transactions needed to generate income statements, balance sheets, and financial reports, allowing founders and other stakeholders to quickly get a big-picture look at your business's finances.

Most businesses have five general ledger account types, including three types of balance sheet accounts and two types of income statement accounts.

Though some businesses have more, all individual transactions the business conducts are entered under at least one of those categories, referred to as control accounts. 

Here we've listed the five types of control accounts, along with a few examples of accounts classified under each type: 

• Assets (accounts receivable, inventory, investments) 

• Liabilities (accounts payable, mortgages, deferred revenues)

• Revenues (sales, service revenues, interest income) 

• Expenses (salaries, expense accounts, rent, depreciation)

• Stockholders' equity (common stock, preferred stock, retained earnings)

Each general ledger control account has multiple sub-ledger accounts, exclusively dedicated to invoices and financial transactions that affect that account, where you can view transactions in greater detail. 

(If you’re getting hung up on the question, “What is a ledger?” it’s just a book where you will record transactions of a given account/accounts.) 

A few key concepts to know

To understand how general ledger accounting works, you'll need to understand a few related concepts: journals, the fundamental accounting equation, and double-entry bookkeeping.

Journals

Before being entered into a ledger, all transactions are first recorded in a journal, which is sometimes referred to as a “book of first entry” or “book of original entry” because it’s the first place a business records transactions. 

A journal entry consists of a description of the transaction, the date of the transaction, the accounts it affected (as dictated by the chart of accounts), the amount(s), and for most businesses will be entered in the double-entry bookkeeping method (more on that in a moment). 

Generally, a business enters transactions into a journal as they occur so that all financial information is as accurate as possible, rather than having to reconstruct or guess details at a later date. 

Though journal entries have traditionally been made manually, some forward-thinking accounting firms are now using artificial intelligence (AI) and machine learning (ML) to automate the task. 

Double-entry bookkeeping

In order to create a general ledger, a business must use the double-entry method of bookkeeping. 

In this method, every financial transaction generates at least two entries—including at least one debit and one credit—which respectively describe whether money is moving to or from an account. 

Each financial transaction in the double-entry accounting method impacts at least two different accounts, and the amount of debits must equal the amount of credits. 

For example: If a hardware store sells a hammer, the general ledger entry for that purchase will show an increase in both the cash and revenue accounts, along with a decrease in the inventory account. 

In other words, double-entry bookkeeping tracks both where money is coming from and where it’s going. If a business doesn’t record transactions according to the double-entry method, they won’t have the detailed information necessary to create a general ledger.

The basic accounting equation

The foundation of the double-entry accounting system is a simple formula that defines the relationship between balance sheet accounts:

Assets = Liabilities + Equity

In the equation, assets include all resources the business owns, including fixed assets, like equipment and buildings, current assets, like cash, and even intellectual property, like patents or copyrights. 

A liability is an obligation that a business owes another entity, like accounts payable owed to a supplier or a mortgage owed to a bank. 

Equity is the amount that would be due to the business’s owners after all debts and liabilities are paid and can include contributions the owners have made to the business, plus profits or minus losses as calculated by deducting expenses from revenue. 

Each transaction entered to both the journal (and later, the general ledger) is organized according to this equation, with debits on the left and credits on the right. 

For accurate account reconciliation, the total debit balances must equal the total credit balances. 

As we mentioned above, businesses usually enter transactions in the journal as they occur then transferred to the general ledger at the end of a financial reporting period. 

However, like creating journal entries from transactions, some accounting firms have begun to automate the process of transferring journal entries to the general ledger.

How does a general ledger work?

Now that you have an understanding of where general ledger data comes from and the accounting principles that underlie how to record and organize that data, it’s time to take a look at what you’re able to do with the financial report.

Once you’ve compiled all the transaction data from your journals and organized it into ledgers according to your chart of accounts, you’ll be able to:

• Access an at-a-glance view of the general financial status of your business.

• Generate a trial balance to ensure that debits and credits are equal, verifying the accuracy of your transaction records.

• Easily file tax returns due to the accessibility of expense and revenue records.

• Capture an accurate look at your revenue and expenses in order to make informed spending decisions.

• Identify unusual transactions and determine why they occurred.

• Spot and stop fraud and, perhaps most importantly... 

• Quickly and easily compile the data necessary to create the three basic financial statements: 

• The income statement, which shows how much money your company made and spent in a given period of time

• The balance sheet, which shows what your company owns and owes at a specific point in time

• The cash flow statement, which shows differences in how much cash is available, where it came from, and where it goes

The ability to generate each basic financial statement is especially vital to your startup because, together, they let you gain a clear picture of your business’s liquidity, profitability, and overall financial health.

How Zeni can help you get the most out of your general ledger

Thorough, accurate financial records are imperative to the success of your startup, and the best way to ensure the thoroughness and accuracy of your books is to work with a professional finance firm.

With Zeni, you’ll have access to our team of top-tier financial management experts, each with years of experience helping startups succeed. 

Our experts will help you set up and maintain your bookkeeping system, including creating a chart of accounts specifically tailored to your business so your general ledger most accurately reflects your business’s financial reality.  

Additionally, Zeni’s accounting software utilizes cutting-edge AI and ML technologies to automate otherwise manual and error-prone bookkeeping tasks, ensuring that your journals, general ledger, and financial statements are all accurate and up to date—so you’ll never have to scramble to fix errors before preparing taxes or presenting to investors. 

For first-time business owners, the ins and outs of accounting basics can be a lot to wrap your head around. And, due to the complexity and interrelatedness of many accounting concepts, it can be difficult to decide where to start.