What is a general ledger?

Definition of General Ledger

A general ledger is a grouping of perhaps hundreds of accounts that are used to sort and store
information from a company's business transactions. The general ledger is organized as follows:
 balance sheet accounts (assets, liabilities, equity), and
 income statement accounts (revenues, expenses, gains, losses)
Under the double entry system of accounting and bookkeeping, every business transaction will
affect two (or more) general ledger accounts. In addition, each transaction's debit amount(s) must
be equal to its credit amounts. As a result, the general ledger is expected to have the total amount
of debits equal to the total amount of credits. Further, when the account balances are listed on
a trial balance, the totals should be equal.
Examples of a General Ledger
In a manual accounting or bookkeeping system, the general ledger is a "book" with a separate
page or ledger sheet for each account. (When a significant amount of detailed information is
needed for an account such as Accounts Receivable, a subsidiary ledger is often used.)
In a computerized system, the general ledger will be an electronic file of all the needed accounts.
This also facilitates the electronic preparation of the company's financial statements.
(source: https://www.accountingcoach.com/blog/what-is-a-general-ledger-account)

A Beginner’s Guide to General Ledgers

Adam Chalker
October 18, 2018
Contributors / Sales
I don’t pay for much with checks anymore, but when I do write one to pay rent every month, I always write
down the check number and the amount in the little paper ledger at the front of my checkbook.

As it turns out, this isn’t the proper way to maintain a ledger at all. Whoops.
Instead, financially-minded individuals — and businesses — use ledgers to fastidiously document money
that’s they’re paying out, or being paid.

And while as an individual, I can rely on my banking app to give me a snapshot of how much money I’m being
paid relative to how much I’m spending, businesses need to maintain more detailed ledgers in order to
accurately and legally conduct financial transactions.

In this blog post, you’ll learn about how businesses document and measure finances using a general ledger, and
how the general ledger helps businesses track financial health and growth over time.

General Ledger (Accounting)

The general ledger tracks all of a company’s accounts and transactions and serves as the foundation of its
accounting system. It’s typically divided into five main categories: assets, liabilities, equity, revenue, and
expenses. These categories contain all accounting data derived from a company’s different sub-ledgers, such as
accounts payable and accounts receivable, and the general ledger records amounts of money that are credited
and debited on a constant basis.

Like a personal checkbook, the general ledger must always be in balance between the credit and debit amounts,
and the information recorded holds all account information about a company over the course of its lifetime that
is needed to prepare the financial statements.
The general ledger details all financial transactions of all accounts so as to accurately account for and forecast
the company’s financial health. Think of the general ledger as the main database of a company’s financial
records and information, with other financial documents being derived from the information recorded in the
general ledger.

Let’s dig into the different elements of the general ledger a little deeper:

Ledger Accounts

There are five different categories the general ledger is broken down into, and these categories are known as
“accounts.” The categories are:

1. Assets
Assets are any resources that are owned by the business and produce value. Assets can include cash, inventory,
property, equipment, trademarks, and patents.

2. Liabilities
Liabilities are current or future financial debts the business has to pay. Current liabilities can include things
like employee salaries and taxes, and future liabilities can include things like bank loans or lines of credit, and
mortgages or leases.

3. Equity
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.

4. Revenue
Revenue is the business’ income that is derived from the sales of its products and/or services. Revenue can
include sales, interest, royalties, or any other fees the business collects from other individuals or businesses.

5. Expenses
Expenses consist of money paid by the business in exchange for a product or service. Expenses can include
rent, utilities, travel, and meals.

The general ledger typically includes a front page that lists the names of the accounts documented within, and
this list is known as the “chart of accounts.” The documentation of one account within the general ledger is
referred to as an “account ledger.”

Sub-Ledgers

Sub-ledgers within each account provide details behind the entries documented in account ledgers, such as if
they are debited or credited by cash, accounts payable, accounts receivable, etc.

Double-Entry Bookkeeping

The double-entry bookkeeping method ensures that the general ledger of a business is always in balance — the
way you might maintain your personal checkbook. Every entry of a financial transaction within account
ledgers debits one account and credits another in the equal amount. So, if $1,000 was credited from the Assets
account ledger, it would need to be debited to a different account ledger to represent the transaction.

This bookkeeping method helps ensure that the business never over-extends itself financially, and that the
general ledger is always in balance to maintain the accounting equation:

Assets = Liabilities + Equity

General Ledger Example
Below is an example of what a blank general ledger sheet would look like before filling in any accounting
information. In the “Account” cell, you would fill in which account ledger’s transactions you were recording:

Source: Double-Entry Bookkeeping
Here’s what a few accounts within general ledger would look like filled out with transaction information:

Source: Accountancy Knowledge
(You can find a general ledger template to fill in with your company’s own financial information in Microsoft
Excel’s template gallery, or by clicking here to download one.)
Next, we’ll dive into a few other financial accounting documents that are closely related to — but distinct from
— the general ledger.

General Ledger vs. General Journal

A general journal lists business transactions according to the date. A business’ financial transactions are first
recorded in a general journal. From there, the specific amounts are posted into the correct accounts within the
general ledger. Sometimes referred to as a book of original entry, the general journal lists all financial
transactions of a business, and the general ledger organizes and balances transactions.
General Ledger vs. Trial Balance

A trial balance is an internal report that lists each account name and balance documented within the general
ledger. It provides a quick overview of which accounts have credit and debit balances to ensure that the general
ledger is balanced faster than combing through every page of the general ledger.

General Ledger vs. Balance Sheet

A balance sheet provides a quick snapshot of the business’ financial health at a specific moment in time by
measuring if its accounting equation is balanced. The balance sheet documents the accounting question
measured above (Assets = Liabilities + Equity) and pulls those numbers from account ledgers within the
general ledger. Balance sheets are typically used when businesses are being evaluated by banks, creditors, or
investors, versus general ledgers which are maintained internally. (You can check out HubSpot’s balance
sheet here.)
(source: https://blackbriefcase.co/a-beginners-guide-to-general-ledgers/)

payment in advance in Accounting

(peɪmənt ɪn ædvæns)
Word forms: (plural) payments in advance
NOUN
(Accounting:  Commerce)
If a business asks for payment in advance, the payment must be received in full before the goods or
services are delivered.
Manufacturers typically require either payment in advance or a letter of credit from a bank.
The company has the right to require payment in advance or an acceptable guarantee of payment from
those who seem unlikely to be able to pay.
If a business asks for payment in advance, the payment must be received in full before the goods or
services are delivered.
(source: https://www.collinsdictionary.com/dictionary/english/payment-in-advance)

Information on an invoices:

1/10, n/30: 1 = 1% discount if you pay within 10 days, n is net value of invoice and 30

days is the payment time of the invoice (due date)

(source: https://www.accountingcoach.com/accounts-payable/explanation/4)

(source: https://www.accountingcoach.com/chart-of-accounts/explanation)