What Is a General Ledger? (With Importance and Features)

By Indeed Editorial Team

Updated July 20, 2022

Published December 7, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Accounting professionals use structured systems to document financial data for a company. Businesses can use a general ledger tool to keep track of their financial data. Understanding and applying accounting concepts for a business is easy if you understand how a general ledger structure works. In this article, we answer the question "what is a general ledger," explain why it's important in accounting, state its features, and provide steps to help you create a general ledger with double-entry accounting and a general ledger template.

What is a general ledger?

You may be wondering "what is a general ledger," especially if you're new to accounting principles and concepts. General ledgers are accounting records that store financial information for a corporation while also accounting for several smaller, personal accounts. General ledgers typically include balance sheet accounts and income statement accounts and records of every cash transaction in the organization. Equity, assets, and liabilities are all accounts on a balance sheet. Comparatively, gains, losses, revenues, and expenditures are all accounted for on an income statement.

You can use a subsidiary ledger when a specific account requires a lot of detailed information. For instance, accounts receivable often records extensive loan and sales information, necessitating the creation of a subsidiary. To balance a company's budget, it's important that all debit amounts in the ledger equal the credit amount for each transaction. When the two balances aren't equal, you can use trial balances to identify a mistake. Accounting professionals used to complete this report manually, but modern accounting software now completes it digitally, automatically correcting any errors.

Related: The Differences Between a Bookkeeper and an Accountant: A Review

Why is a ledger so important?

A general ledger is essential in accounting for recording all of a company's transactions. An accountant can organize the transactional data into assets, liabilities, revenues, expenses, and owner's equity. The accountant prepares the trial balance after each sub-ledger has been closed. They then use the trial balance data to generate the company's financial statements, which include the balance sheet, income statement, statement of cash flows, and other financial reports. Here's the formula that accountants typically use when calculating assets with a general ledger:

Liabilities + Equity = Assets

Ledgers are useful as an organizational tool for facilitating honest communication with financial experts, investors, stockholders, and other stakeholders. A chart of accounts index within a general ledger arranges all financial transactions for a given period into relevant subgroups. The chart of accounts documents the financial statement first and the income statement second. When organizing a general ledger, accountants add an assets account which may include subgroups such as cash, property, or stock on an income statement. Accounts payable, payroll expenses, and a company's credit card are examples of liability subcategories to include on a balance sheet.

Read more: What Is a Business Analyst?

Features of a general ledger account

A general ledger uses five types of accounts or categories to classify a company's transactions. You can subdivide each category into sub-ledgers, which include information such as cash on hand, accounts receivable, and accounts payable. Here's a list of the features of a general ledger account:

Assets

An institution's assets are resources it can use to earn cash. Asset accounts may include:

  • Investments

  • Patents

  • Property

  • Trademarks

  • Cash

  • Copyrights

  • Equipment

  • Inventory

Enterprises can classify assets based on whether they can be utilized in the short term or long term. Cash, accounts receivable, and prepaid expenses are short-term assets because the company plans to consume them within the year. Land, buildings, computers, and software are examples of long-term assets because businesses use them for many years. Companies can also distinguish between tangible and intangible assets. Tangible assets, such as land and equipment, have monetary value if purchased for business purposes. Intangible assets, such as licenses and copyrights, may only be valuable if a company owner purchases them.

Liabilities

Liabilities are legally enforceable financial commitments owed by a person or business to another business or individual. Businesses may increase their liabilities to fund day-to-day operations. Businesses pay cash or transfer assets to the other company or person to resolve liabilities. Liabilities include:

  • Accounts payable

  • Salaries owing

  • Wages owing

  • Interest payable

  • Income tax payable

  • Sales tax payable

  • Customer deposits or pre-payments for goods or services not provided yet

Related: How to Record Accrued Interest Journal Entry (With Formula)

Equity

Equity is the variation between total assets and debts in a general ledger. It's the difference between a business owner's total earnings and the amount of money they've invested in the business. If a business sells all of its assets for cash to pay off its liabilities, any cash left over is equity. Equity accounts include:

  • Common stock

  • Preferred stock

  • Contributed surplus

  • Additional paid-in capital

  • Retained earnings

  • Other comprehensive earnings

  • Treasury stock

Related: Guide: How to Become a Stockbroker

Expenses

Expenses are the costs that the company pays to generate revenue. For example, the monthly cost of utilities or the lease on a building are expenses. An expenditure can also come in the form of devaluation of an asset, which a company calculates over time. Expense accounts include the following:

  • Advertising

  • Rent

  • Salaries

Revenue

The sale of products or services generates revenue for a company. It can indicate an increase in assets or a reduction in liabilities. Accounts for revenue include:

  • Sales

  • Royalties

  • Profit

  • Licensing fees

  • Service charges

How to use general ledgers with double-entry accounting

Double-entry accounting is a method of keeping accounting records and detecting mistakes. It works by ensuring that any debit account entry gets counterbalanced by an equal credit account entry, helping to ensure that the total of all debits equals the total of all credits. It's important that financial transactions get recorded in at least two accounts. You can calculate this structure, also known as a T-account, with a formula known as the accounting equation, which is as follows:

Liabilities + Owner's Equity = Assets

Assets refer to an item of value that a business has that improves their revenue inflow. Cash, real estate, equipment, and intangible assets like patents and copyrights are all considered assets. Any debt that the company owes to another party is a liability. Short-term payroll expenses, current liabilities to clients, and long-term loans to a financial institution are examples of debts. Equity is the amount a business owner has invested in the business, plus any gains or losses. In this situation, losses are negative values. Businesses can use a general ledger to help with double-entry accounting by following these steps:

1. Set up the ledger and list all the debit and credit transactions

It's important first to create and organize your ledger. Double-entry transactions, also known as journal entries, include debit entries on the left and credit records on the right. It's important to record each transaction in the credit and debit accounts. For example, if a person invests $10,000 of their own finances in a business, you can consider this a debit to cash, which raises its assets. It may also mean the person has equity, increasing their stake in the business.

2. Build systems for confirmation

Even though current accounting software has processes to automate this step, a company's auditor or controller may prefer to review the documents manually. This can aid in the detection of errors, allowing businesses to make corrections before completing financial reports or sharing information with third parties. By doing this, the accounts are more likely to present accurate and precise data.

How to create a general ledger template

You can create a general ledger template by completing the following steps:

1. Get familiar with the parts of the ledger

The first step in creating a general ledger template is determining which components to include. A standard general ledger has seven different types of accounts. Every account has its own page or may have multiple pages, based on how much financial information you want to record for each account. They can also have sub-ledgers containing information, such as the number of funds they have and accounts payable and receivable.

2. Choose your bookkeeping method

Select your bookkeeping method after determining which accounts to include in a ledger and what information to include on each ledger page. The first option is to keep a physical ledger in which you handwrite and calculate transaction information. Another option is to use one of the numerous computer programs available to assist you in creating and maintaining the company's general ledger. When recording transactions, accounting professionals initially record them in the general journal and then in the general ledger. Using this system allows them to keep detailed records and balance the books.

3. Create your ledger

Set up your general ledger after you've decided on a bookkeeping method. You can include all the accounts that relate to the company and consider whether you need multiple pages or sub-pages to record the details for each account. Create your ledger with columns and rows to make it easier to view and access your data. Even though most ledgers follow a similar page layout style, you can personalize your ledger to include additional sections to meet the record-keeping needs of the business.

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