How to Do a General Ledger for Your Business

A general ledger is the central record-keeping system for all financial transactions within a business. It provides a complete, organized historical record of financial activity, essential for understanding a company’s financial position and performance. Businesses use it to track cash flows, assets, liabilities, revenues, and expenses.

Understanding General Ledger Fundamentals

The general ledger organizes financial information into fundamental account types: assets, liabilities, equity, revenue, and expenses. Assets represent what a business owns, such as cash, accounts receivable (money owed by customers), inventory, and equipment.

Liabilities are what a business owes to others, including accounts payable (money owed to suppliers) and loans. Equity signifies the owner’s investment in the business, representing the residual value after liabilities are subtracted from assets. Revenue accounts record the income generated from sales of goods or services, while expense accounts track the costs incurred to operate the business, such as rent, salaries, and utilities.

A chart of accounts is a detailed list of all accounts a business uses in its general ledger. Each account includes a unique identification code and a brief description. The chart groups accounts into the five main categories: assets, liabilities, equity, revenue, and expenses, often with specific numbering ranges (e.g., 1000-1900 for assets). It acts as a blueprint for the accounting system, guiding where each transaction should be recorded.

All financial transactions are recorded using debits and credits, the two sides of every transaction. A debit is an entry on the left side of an account, and a credit is an entry on the right side. Debits increase asset and expense accounts, while credits increase liability, equity, and revenue accounts. Conversely, credits decrease asset and expense accounts, and debits decrease liability, equity, and revenue accounts. Every transaction must have equal total debits and total credits to maintain balance in the accounting equation (Assets = Liabilities + Equity).

Recording Transactions in the General Ledger

Individual business transactions are first recorded in journals, such as a sales journal or a cash receipts journal, before being transferred to the general ledger. This transfer process, known as “posting,” moves the detailed information from the journal entries to the appropriate individual general ledger accounts. Each journal entry provides specific details like the transaction date, a description, the affected account names, and the debit or credit amounts.

For example, when a business makes a cash sale of $500, the cash account (an asset) is debited for $500, and the sales revenue account (a revenue) is credited for $500. If a business purchases supplies on credit for $200, the supplies expense account (an expense) is debited for $200, and the accounts payable account (a liability) is credited for $200. This reflects the increase in expenses and the increase in the amount owed.

When a business pays an expense, such as a $1,000 rent payment, the rent expense account (an expense) is debited for $1,000, and the cash account (an asset) is credited for $1,000. This indicates an increase in expenses and a decrease in cash. Similarly, if a business receives a $300 payment from a customer for a previous credit sale, the cash account (an asset) would be debited for $300, and the accounts receivable account (an asset) would be credited for $300, showing an increase in cash and a decrease in money owed by customers. After each transaction is posted, each general ledger account maintains a running balance, reflecting the cumulative impact of all recorded debits and credits.

Using the General Ledger for Financial Reporting

After all transactions are recorded and posted to the general ledger, the final balances from each account are compiled into a trial balance. This internal report lists every general ledger account and its ending debit or credit balance at a specific point in time. The primary purpose of the trial balance is to verify that the total of all debit balances equals the total of all credit balances.

The balanced trial balance then serves as the direct source for preparing the primary financial statements. Information from the asset, liability, and equity accounts feeds into the Balance Sheet, which presents a company’s financial position. The revenue and expense account balances are used to prepare the Income Statement, also known as the Profit and Loss statement, which summarizes a company’s financial performance over a period. The general ledger is the source for these and other financial reports, providing transparency and supporting informed business decisions.