What Is a General Ledger and How Does It Work?

The general ledger is the cornerstone of your business's bookkeeping practices and is key to maintaining accurate and tax-ready finances. It's also essential for growth and ongoing compliance activities. Accurately setting up and maintaining your ledger is time-consuming, detail-heavy work that can be stressful without expert assistance.

This comprehensive guide explains what a general ledger is and how it works. However, if you prefer professional support, 1-800Accountant, America's leading virtual accounting firm, is here to help with a tax-deductible, full-service bookkeeping solution powered by real bookkeepers. When your books and general ledger are maintained by professionals on behalf of your business, it provides peace of mind and the confidence to make critical, long-term business decisions based on real-time data provided by our bookkeepers.

Key Takeaways

• A general ledger is the master financial record of your business, tracking every transaction across assets, liabilities, equity, revenue, and expenses.

• Keeping your ledger accurate and up to date is essential for decision-making, tax compliance, and investor transparency.

• The general ledger differs from journals and balance sheets by providing a complete history of all financial activity, not just a snapshot in time.

• Double-entry bookkeeping (every transaction recorded as a debit and a credit) ensures accounts stay balanced and reduces costly errors.

• A well-maintained ledger makes it easier to generate financial statements, including income statements, balance sheets, and cash flow reports.

• Modern accounting software can streamline ledger management, while professional bookkeeping support saves time and adds expertise as your business grows.

• A properly managed ledger helps you avoid IRS penalties by ensuring accurate quarterly, annual, and payroll reporting.

What Is a General Ledger?

The general ledger is the master record of every financial transaction you make as part of your business. Every time money changes hands, there should be a record of it.

Central to the general ledger is the chart of accounts, which organizes all of the different accounts for your business. Wherever the money goes, you can keep track of it with the chart of accounts.

You'll use a general ledger most often for double-entry bookkeeping, which means making two entries for every financial transaction you record. Each exchange affects two subsidiary ledgers in your chart. Every time you make a sale or a purchase, that business transaction should be recorded as a debit and a credit. 

The recording you do for each transaction is called a journal entry. Because each entry you post to the ledger appears in both debits and credits, it should be easy to balance the accounts and make sure everything adds up later. 

General ledgers were once primarily documented in physical records, but this has changed over the years, with digital documents becoming increasingly common. Off-the-shelf accounting software might have the features you need to maintain your ledger, or you might consider keeping everything in a spreadsheet form.

General Ledger vs. Balance Sheet vs. Journal

While you may have heard the two terms used interchangeably, a general ledger and a balance sheet are not the same. 

One of the main differences between a general ledger and a balance sheet is the scope. The general ledger is the financial record for the entire life of the business and should include all transactions, dating back to the business's inception. On the other hand, the balance sheet provides a snapshot of your business's financial position at a specific point in time. 

You'll use a balance sheet to show your business's current assets and liabilities, providing a quick understanding of its current financial position. The general ledger includes all of that information. 

Similar to a balance sheet, a journal and the general ledger are sometimes used interchangeably. While a journal is chronological, the ledger is a collection of accounts that summarize your business's transactions. 

Balance sheets and journals are important, and the general ledger is your business's master record. 

Why Is a General Ledger Important?

A general ledger is crucial for easy and effective bookkeeping because it keeps you coordinated and in control of your business's finances. You need one place for everything to be organized so that you can get a clear sense of your financial health at a glance.

This is crucial for your own informed decisions as a business owner, including hiring, inventory purchases, and growth planning. But the general ledger is essential for reasons beyond decision-making support.

Whenever you need to report on your business's financial situation (income statement, balance sheet, cash flow), the general ledger will provide the necessary information. Ensuring your ledger is up to date makes creating income statements and financial reports easier, as you won't have to second-guess the accuracy of the data. This also simplifies the tax preparation process, ensures compliance, and empowers you to hit quarterly and annual reporting deadlines.

At the end of every quarter, compile a trial balance worksheet as a report of your current account status and cash flows. This allows you to compare financial statements from each subsidiary ledger and ensure that they all balance. If you're always up to date, you won't have to do any extra work when preparing a report for a prospective investor, which is also critical for transparency. 

How Does a General Ledger Work?

Every business transaction has its place in the general ledger. Each journal entry is recorded in the appropriate general ledger account, following the principles of double-entry accounting.

As transactions are recorded, the general ledger continuously updates the balances of each account. Debits and credits impact the account balance differently depending on the account. 

Additionally, the general ledger serves as the foundation for financial reporting. By collecting transaction data, the ledger helps prepare key financial statements, including:

• Balance sheet

• Income statement

• Cash flow statement

These statements are included in reports that provide stakeholders with insights into your business's financial health and performance.

Accounts Included in a General Ledger

So what goes into your general ledger? Each of the different accounts in your chart of accounts fits into either assets or liabilities. As you balance your ledger, these accounts should fit together following this basic accounting equation: Assets = Liabilities + Equity. It's foundational to the double-entry bookkeeping system you'll use for your general ledger.

We've listed the key accounts you should include as the core of your general ledger's chart of accounts below. You'll likely recognize them as some of the most common bookkeeping terms. 

Accounts Receivable

Accounts receivable are debits. These are assets that represent the money you are owed. These are often orders for goods or services that have not yet been paid for. You are expecting to receive these payments, but you haven't collected them yet.  

Accounts Payable

Accounts payable is the opposite. These liabilities include all the money you owe but haven't yet paid. Whenever you place an order with your suppliers, the payment you owe will be recorded in accounts payable until it is paid in full. 

Cash

Cash is the money you have now. This refers to all the funds you have in expense accounts ready to be spent. It's essential to keep track so that you don't end up spending money you don't have. 

Inventory

Your inventory is another essential category that requires careful recording. These are assets that you've paid for and are waiting to sell to your customers. You've invested money in this inventory, and you need it to pay off.

Assets

Assets are resources that your business owns that have economic value, including cash, accounts receivable, and inventory. Tracking asset accounts is a crucial aspect of your chart of accounts, as it supports financial reporting and analysis. 

Liabilities

Unlike assets, liabilities are your business debts and financial obligations owed to others, including loans and accounts payable. These liabilities are categorized on your balance sheet and may include both short-term and long-term obligations. 

Equity

Equity, sometimes referred to as owner's equity, represents a shareholder's interest in the business's assets after all liabilities have been paid. Accounts within the equity category include common stock, retained earnings, and owner's draws. 

Revenue

The revenue you record typically includes sales, service income, and other income related to your business's primary operations, although it can also come from different sources. Tracking revenue allows you to monitor financial performance and produce financial statements. 

Expenses

The outflow of business funds or the use of assets your business uses to generate income are referred to as expenses. Business expenses may include payroll, rent, and supplies. Tracking expenses helps you monitor your spending and identify potential cost-saving opportunities. 

Modern General Ledger Tools for Small Businesses

Although maintaining your general ledger can be tedious and time-consuming, digital tools and cloud-based accounting software, such as QuickBooks, Xero, Wave, and 1-800Accountant's proprietary ClientBooks, make the process easier. The benefits of using these modern tools include: 

• Automation

• Error reduction

• Real-time reports

• Tax filing integration

While modern digital accounting tools can be helpful, they're no replacement for 1-800Accountant's full-service bookkeeping solution. Gain time and peace of mind knowing your designated bookkeeper is handling your audit-ready books. 

General Ledger and Tax Compliance

Having a well-kept general ledger prevents mistakes, penalties, and IRS red flags, while promoting overall tax compliance. 

Your general ledger ensures accurate reporting for:

• Quarterly estimated tax payments (Due by April 15, June 15, September 15, and January 15).

• Annual tax filing (IRS Form 1040, U.S. Individual Income Tax Return, and IRS Form 1120, U.S. Corporation Income Tax Return).

• Payroll reporting (IRS Form 941, Employer's Quarterly Federal Tax Return).

Keeping Your Business Running Smoothly

Maintaining consistent bookkeeping and establishing a regular schedule for monthly reconciliations will help keep your business running smoothly. As your business matures and grows, you will likely find it increasingly difficult to maintain this pace, which is when it's time to consider outsourcing.

Professional, outsourced bookkeeping from 1-800Accountant saves time, prevents costly errors, and generates the insights you need to make important business decisions. Schedule a free, 30-minute consultation with one of our small business experts today. 

FAQs About General Ledgers

Is a general ledger required for small businesses?

Establishing and maintaining a general ledger is not a legal requirement; however, you severely diminish your ability to grow and compete without one. While small business owners may strategically cut corners early on, it is always advisable to establish a central record of all your business activities.

How often should I update my general ledger?

You should update your general ledger regularly, basing the frequency on your transaction volume. Update your general ledger daily or weekly if you're experiencing high volume, and bi-weekly or monthly during slow periods. Regardless of which applies to your business, remember that consistency is key. 

What’s the difference between a general ledger and a journal?

A journal records transactions chronologically, while a general ledger is regarded as your master record. This is the main difference between the two. 

Can software fully replace a bookkeeper?

While accounting software can automate certain functions and support your operations better than no bookkeeper at all, software is not a complete replacement for an experienced bookkeeper. Accounting software is a valuable tool, while an experienced bookkeeper can generate much more value, particularly as your business grows and matures. 

Maintaining Your General Ledger

When it comes to accuracy, compliance, and overall business health, it's incredibly important to establish and maintain your general ledger. Creating sustainable growth requires keeping all of these accounts, and there's no better way to do it than with your ledger. This way, bookkeeping won't ever fall off your list of priorities and slip through the cracks.

As your business expands, you will see the value in handing off these tasks to a qualified outsourced firm to maintain your business records. When that happens, it's time to talk to the bookkeeping and accounting experts at 1-800Accountant. Our affordable, tax-deductible full-service bookkeeping solution maintains your books for you, providing peace of mind and the freedom to focus on your next business milestone. 

Schedule your free 30-minute consultation today to learn more about the benefits of professional bookkeeping for your business.