What Is a General Ledger?
The general ledger is the foundation and core document of your accounting system. It is created from the accounting journal entries you have made. Accounting journal entries are made for every financial transaction your firm undertakes and are made in chronological order. The general ledger takes the entries of the financial transactions from the accounting journal, stated in debits and credits, and breaks up the entries into their separate accounts. Each entry belongs to one of five different accounts that come from your Chart of Accounts: assets, liabilities, expenses, revenue, and equity.
Why a General Ledger Is Important
The general ledger serves several functions in the financial operation of your business. Think of it as a catch-all bucket. It holds all the financial information you’ll use to create the financial statements for your firm and it is based on a source document, along with at least one journal entry for each financial transaction. A source document can be something like an invoice or a canceled check that shows you paid the receipt. Here are five reasons that the general ledger is so important for your business:
General Journal vs. General Ledger
The general journal and general ledger are used by those firms that use double-entry accounting as the best record of their financial transactions. The two major differences between the general journal and general ledger in a business firm are that the general journal is the first place a financial transaction is recorded by a business. If each account balances, so will your financial statements when you develop them at the end of whatever time period you have established. From these documents, you can develop your financial statements by conforming to the accounting equation. The general ledger sometimes has sub-ledgers usually for these four accounts: sales journal, purchases journal, cash receipts journal, and cash disbursement journal.
How to Create a General Ledger
Here is an example of a general ledger: _____________________ Account
1) Create the General Ledger Accounts
There are five accounts that are relevant to the general ledger in a form similar to that in the table above. They are the assets, liabilities, equity, revenues, and expenses accounts. Create a table like the one above for each account.
2) Transfer the Transactions From the General Journal
Transfer the financial transactions from the general journal to the appropriate accounts on the general ledger with all their detail.
3) Number the Transactions
Under the “number” column, put the number of the journal transaction on the general ledger account. That allows for cross-referencing.
4) Debits and Credits
Debit and credit the appropriate accounts.
5) Balance
Keep a running balance of the debits and credits so you can determine if the account will balance when you have entered all the transactions. The general ledger then becomes the master financial document for your business with columns for the name of the transaction, debits and credits, and the dollar amount, along with a running balance. Today, there is a number of accounting software packages that allow journal transactions to be easily transferred into the general ledger accounts.
Example of a General Ledger
Your business is an ongoing small business. For example, on January 2, 2021, say you buy $4,000 worth of inventory with cash. Here is the general ledger entry with the corresponding journal entry.
