What is the General Ledger in Accounting?

The general ledger is the central part of any accounting system.  One might describe it as the keeper of all financial transactions of an organization.

The general ledger in accounting is the ledger which includes every account from the chart of accounts and every detail transaction incurred by an organization.  The general ledger complies with the double entry accounting rule and documents every debit and credit of every account.

Within the general ledger you will find beginning balances, detailed transactions, and ending balances for all accounts.  It is the source information for all other reporting and analysis of an organization.

How the general ledger works

As mentioned, the general ledger follows the double entry rule of accounting which requires every transaction to have a debit and a credit entry with the debits equaling the credits.

The general ledger includes every account from the chart of accounts and is organized in the same order of assets, liabilities, equity, revenue, expense and gains/loss.  Each transaction will ultimately affect one or more of each of these account types.

It is important to remember that every transaction is recorded in the general ledger regardless of whether it is a transaction, journal entry, adjustment, or reclassification.  The general ledger includes everything:  deposits, checks, payroll, taxes, sales, receipts, inventory adjustments, bills, owner contributions, and journal entries.

To illustrate, below are some typical entries you may find recorded in a general ledger.

Entry for Cash Receipt

If an organization receives a payment of $250 from a customer for a past invoice the entry in the general ledger would appear as follows:

Cash $250
Accounts Receivable $250

Entry for Payment of a Bill

If an organization pays their rent of $1,750 for the month of November the entry in the general ledger would appear as follows:

Rent Expense $1,750
Cash $1,750

Entry to Accrue Payroll

If an organization needs to accrue 2 days of payroll not yet paid to properly show the payroll expense in the correct period the entry in the general ledger would appear as follows:

Payroll Expense $735
Accrued Payroll Liability $735

Entry for Interest Expense

If an organization has a loan outstanding of $5,000 with interest payable annually at 5% the recording of the annual interest expense entry in the general ledger would appear as follows:

Interest Expense $250
Interest Expense Payable $250

You will notice the accrued payroll and the interest expense entries were non cash entries, meaning no cash was received or paid at the time of the entry.  But each entry reflects an obligation to be paid in the future and therefore is still essential to be recorded in the general ledger at the time the obligation is incurred.

What is an example of the general ledger in accounting?

Below is a visual example of a QuickBooks Online general ledger.  Of course, it only displays a few accounts.  The full general ledger will display many many accounts and all the details.

Included in the general ledger is

• Account Number/Name
• Beginning Balance
• Date of transaction
• Transaction type.  The example below happens to display expense accounts
• Number.  Any reference numbers associated with the transaction
• Name.  Vendor name or 3rd party references.
• Memo/Description.  A summary description of the transaction
• Split.  This is the other account from the double entry method of accounting
• Amount
• Balance.  Also known as the ending balance.  The running balance which takes the beginning balance and adds or subtracts the respective debits and credits from all transactions associated with that account.

What is the difference between the general ledger and a subsidiary ledger?

Ledgers are classified into two categories:  general ledger and subsidiary ledgers.

The general ledger - there is only one general ledger and it includes all transactions, even summary transactions from the subsidiary ledgers.

The subsidiary ledgers - there are many subsidiary ledgers (accounts receivable, accounts payable, cash receipts, cash payments, sales and purchases).  Subsidiary ledgers include only transactions related to a specific account.  The detail transactions of a subsidiary ledger are summarized and transferred to the general ledger.

Depending on the size of organization and the number of transactions, you may decide against using both types of ledgers.

6 reasons why you should use the general ledger

1. All transactions included in one place.

There is value in having all transactions located in one single report.  It helps answer questions.  It streamlines entry and reporting.  It allows you to view all activity for certain time frames.  And most importantly it provides in one place an accurate record of all financial transactions.

2. Helps create all other reports.

Accounting is only beneficial if you can organize it into useful reports and information.  The general ledger does all of this.  It streamlines the ease of creating a trial balance by taking the ending balance for all accounts and placing it on the trial balance.  From the trial balance all other financial reports can be generated including the balance sheet, income statement and statement of cash flows.

3. Beneficial in filing tax returns.

Tax returns require detailed information, the general ledger has this information all in one place making it easy to identify income and expenses for the period.

4. Includes real revenue and expenses.

The general ledger includes real revenue and real expenses allowing you to compare and analyze specific accounts and understand why revenue may be down or why expenses may be up.  It provides the specifics to answer questions of concern.

5. Highlights potential errors.

The general ledger is an easy report to scan looking for nonrepetitive transactions.  For instance, you pay the same amount of rent every month so you should see 12 transactions for the same amount.  If a different amount shows, it immediately raises concern.  If you see a journal entry that may raise questions.  Potential errors are easily identified.

6. Helps identify fraudulent activity.

Similar to identifying potential errors, scanning the general ledger also highlights irregularities or fraudulent activity.  It shows vendor names and amounts that might just raise a red flag.

In our modern world, accounting has been made simple due to online accounting systems.  Reports like the general ledger are produced simply by pushing a button.  Transactions still have to be entered into the accounting system, but once entered they are checked to ensure debits equal credits and then posted to the appropriate places.

That said, understanding the concepts is still important as that understanding allows you to use the information correctly.