General Ledger Definition, Importance, Account Types

Therefore, a General Ledger helps you to know the ultimate result of all the transactions that take place with regards to specific accounts on a given date. General Ledger refers to a record containing individual accounts showcasing the transactions related to each of such accounts. It is a group or collection of accounts that give you information regarding the detailed transactions with respect to each of such accounts. In this guide we’ll walk you through the financial statements every small business owner should understand and explain the accounting formulas you should know. For example, cash and account receivables are part of the company’s assets. Now let’s move on to talk about debits vs. credits and how they work in an accounting system.

This is done by comparing balances appearing on the Ledger Accounts to the original documents like bank statements, invoices, credit card statements, purchase receipts, etc. Unlike Operating Expenses, starting a bookkeeping business the Non-Operating Incomes and Expenses are one-time incomes or expenses that you earn or incur. Thus, assets are items of economic value that can be converted into cash or cash equivalents.

  • General Ledger Accounts help you to record details of transactions that your business undertakes over an accounting period.
  • For example, debiting an income account causes it to increase, while the same action on an expense account results in a decrease.
  • When recording journal entries, make sure your debits and credits balance.
  • It records all the transactions that take place between you and your debtors.

Dummies helps everyone be more knowledgeable and confident in applying what they know. The example shows the electricity expense account which is on page 21 of the ledger. The name of the account ‘Electricity Expense’ and its account code 640 are also shown in the heading.

General ledgers and double-entry bookkeeping

So, liabilities can be further divided into current liabilities and non-current liabilities. But, you can refer to the related subsidiary account if you need to check any detail regarding the sales made to a specific customer. Accordingly, you do not record details of each sales transaction undertaken with various customers in the Accounts Receivable Control Account. Here, a Subsidiary Ledger is a ledger recording detailed information of the related Control Account.

  • “[The general ledger] is comprised of assets, liabilities, owner’s equity, revenue, cost of goods sold and expense accounts,” said New York-based small business bookkeeper Barbara Cross.
  • As per this principle, there are at least two accounts involved when a particular transaction takes place.
  • These articles and related content is provided as a general guidance for informational purposes only.
  • Journal entries will also contain the date of the transaction, a reference number, and a description explaining what type of financial activity took place.

A purchase ledger, or creditor’s ledger, accumulates all accounts’ payable balances. A separate general ledger account is set aside for each specific type of transaction. Certified public accountants (CPAs) and bookkeepers typically are the ones accessing and using general ledgers. Following the accounting equation, any debit added to a GL account will have a corresponding and equal credit entry in another account, and vice versa. Some of these accounts are balance sheet accounts and some are income statement accounts. A Control Account is nothing but a General Ledger Account where you record only the summarized information regarding a specific account.

General Ledgers and Double-Entry Bookkeeping

Most accounting software will compile some of these ledgers together while still letting you view them independently. Depending on the size of your business and what your business does, you may not need to use all of them. Here are some common types to be aware of and when to use them, beginning with a general ledger of course. The general ledger is a record-keeping system of all the financial transactions of a business, organized into accounts. At the month end the difference between the total debits and credits on each account represents the balance on the account.

The debit and credit balances are simply organized according to their type of account. Any accounts not in these ledgers such as asset, liability, and capital accounts remain in the general ledger. As with the main ledger, postings to the subledgers are from the books prime entry. A trial balance is an internal report that lists each account name and balance documented within the general ledger.

Expense accounts

The set of 3-financial statements is the backbone of accounting, as discussed in our Accounting Fundamentals Course. A subsidiary ledger (sub-ledger) is a sub-account related to a GL account that traces the transactions corresponding to a specific company, purchase, property, etc. If a GL account includes sub-ledgers, they are called controlling accounts. In accounting, a General Ledger (GL) is a record of all past transactions of a company, organized by accounts. General Ledger (GL) accounts contain all debit and credit transactions affecting them. In addition, they include detailed information about each transaction, such as the date, description, amount, and may also include some descriptive information on what the transaction was.

Accounts payable is the money a company owes to its suppliers and vendors for products and services purchased on credit. When a company buys something from a vendor, it typically doesn’t pay for it immediately. Although there are many possible accounts in a general ledger, they can all usually be classified into permanent and temporary categories. Let’s look at some of the accounts small businesses may use in the general ledger.

Next, we’ll dive into a few other financial accounting documents that are closely related to — but distinct from — the general ledger. Equity is the difference between the value of the assets and the liabilities of the business. If the business has more liabilities than assets, it can have negative equity. Equity can include things like common stock, stock options, or stocks, depending on if the company is privately or publicly owned by owners and/or shareholders. An accounting ledger is the physical or digital record of a company’s finances and can include liabilities, assets, equity, expenses, and revenue.

Double Entry Bookkeeping

The purpose of the general ledger book is to provide a permanent record of all financial transactions and balances classified by account. A business’ financial transactions are first recorded in a general journal. A general ledger uses the double-entry accounting method for generating financial statements.

List of General Ledger Accounts and Content

In this instance, one asset account (cash) is increased by $200, while another asset account (accounts receivable) is reduced by $200. The net result is that both the increase and the decrease only affect one side of the accounting equation. Subsidiary ledgers include selective accounts unlike the all-encompassing general ledger. Sometimes subsidiary ledgers are used as an intermediate step before posting journals to the general ledger. As you can see, columns are used for the account numbers, account titles, and debit or credit balances. The debit and credit format makes the ledger look similar to a trial balance.

After you’ve assessed what debit and credit entry applies to each specific account and journalized your transactions, it’s time to create the general ledger accounts. By definition, the general ledger is the main record-keeping system of a company’s financial transactions. The document holds crucial information needed to prepare financial statements at the end of the year. At the end of each fiscal period, a trial balance is calculated by listing all of the debit and credit accounts and their totals.

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