A general ledger is a record of all the financial transactions in your business. It shows what your business owes, owns, buys and sells.
General ledger can also be called simply accounts. It is everything you bookkeep using the double-entry bookkeeping system.
The general ledger organizes transactions into the categories assets, liabilities, equity, revenue, and expenses.
Assets, liabilities and equity make up your balance sheet, while revenue and expenses make up your income statement.
Why use a general ledger
There are many reasons to bookkeep the transactions in your business.
First and foremost, it is a requirement if you earn above a certain threshold. The threshold will vary from country to country, so you should check what applies to you.
There are also other benefits to keeping a general ledger:
- It gives you an up-to-date overview of the financial health of your business, and helps you make good business decisions
- It helps you with budgeting and financial planning
- You need it to generate various financial reports, such as the income statement and balance sheet
- It gives investors and stakeholders an overview of your business
Let’s take a closer look at how the general ledger works with some examples.
Examples of transactions
You bookkeep every transaction two places in your accounts. This is called credit and debit. Here’s an example:
You do a job for a client, and invoice them for $600.
In your general ledger you would record the sale as:
+$600 in accounts receivable. This is an asset.
– $600 in revenue. This is because revenue is weighed against expenses, which are recorded as debit (+). Confused? It might be a good idea to get help from an accountant.
When you receive the payment, you would record it as:
- $600 bank deposit, if the client paid via bank transfer. This is an asset.
- $600 in accounts receivable, since the debt has been paid. This is also an asset.
Balancing out to 0 is the point of the double-entry bookkeeping system. In this example, your assets balance out to 0.
If you end up with another number, you know there is an error somewhere in your general ledger. You can try to spot the error by doing a bank reconciliation.