General Ledger Basics: Definition and Examples

A general ledger is used to record all financial transactions within a company and contains important information needed to prepare a company’s financial statements. Companies that use double-entry bookkeeping use general ledgers to record their business transactions.

Double-entry accounting requires each transaction to have both a debit and a credit entry, with debit entries recorded on the left side and credit entries recorded on the right side. The debit balance should be equal to the credit balance at all times.

In this article, we’ll take a closer look at what a general ledger is, why it’s important, and how to use it. More specifically, we’ll discuss:

• What is a general ledger?
• Why are general ledgers important?
• 6 common types of general ledger accounts
• How do you write a general ledger?

What is a general ledger?

A general ledger is a master accounting document that includes a business’s past credit and debit transactions and serves as the foundation of the double-entry accounting system. These transactions are organized by account, like assets, liabilities, expenses, and revenue.

The general ledger is important for assessing a company’s financial performance. As a business owner, you can use a general ledger to form a more accurate picture of your company’s financial standing and profitability, which may lead to better financial decisions.

Many financial reports, such as cash flow statements, income statements, and balance sheets, are created using the transaction details contained in the general ledger.

Let’s look at an example of a general ledger entry. Let’s say you own a marketing agency and receive a $500 payment from your client for your services. You delivered this service to your client the previous month.

Your company has more cash after receiving payment, and cash is considered an asset. This means that your cash account will increase by $500. Asset accounts increase on the debit side, so the cash account needs to be debited $500. Your accounts receivable account, which is also an asset, must be credited since you have now received the money that your client owed you.

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With the double-entry accounting method, every debit has a credit of an equal amount to ensure that total debits equal total credits. Our example entry meets this criterion since the cash account was debited and the accounts receivable account was credited.

The accounting equation—which states that total assets must be equal to total liabilities and equity—remains balanced.

Why are general ledgers important?

General ledgers are important when it comes to your company’s financial health because they can help you balance your books by compiling a trial balance and producing important financial statements.

Overall, general ledgers help companies:

• Track financial performance and cash flow
• File taxes correctly
• Visualize every financial transaction

Staying on top of your company’s accounting records isn’t the easiest task. While many small business owners use Excel to track their finances, this process is often  time-consuming and has the potential for creating accounting errors.

To ensure your books are up-to-date and all transactions are recorded accurately without cutting any corners, it’s valuable to have help along the way. Hire someone to do this important process for you by finding a professional and qualified independent bookkeeper on Upwork.

6 common types of general ledger accounts

A general ledger typically records the following accounts:

• Assets
• Liabilities
• Equity
• Revenue
• Expenses
• Other income accounts

This structured process helps investors, management, stakeholders, and analysts assess the ongoing performance of the company.

Asset accounts

Asset accounts record assets owned by your company. These accounts are debited if assets enter the company and are credited if assets leave the company.

Assets provide economic benefits to the company, either now or in the future. Some examples of asset accounts include:

• Accounts receivable
• Cash
• Inventory
• Investments

Liability accounts

This account type records all of your company’s liabilities (also referred to as the company’s debts). Whenever your company incurs more debt, these accounts are credited to increase liabilities. If your company makes a payment toward its debt, the liability account is debited.

The following are examples of liability accounts:

• Accounts payable
• Notes payable
• Accrued expenses
• Customer deposits

Stockholders’ equity accounts

Stockholders’ equity can also refer to shareholders’ or owner’s equity. You can calculate the equity of your company by subtracting the company’s liabilities from its assets.

We can conclude that stockholders’ equity is equal to the remaining assets available to the company after all liabilities have been paid.

Below are some examples of stockholders’ equity accounts:

• Common stock
• Retained earnings
• Treasury stock

Revenue accounts

Revenue refers to the assets that your company has earned through its business activities, such as revenue earned by delivering a service. For example, if you own a plumbing company and have delivered a plumbing service to a customer, the service revenue account will be credited since revenue accounts increase on the credit side.

The following are examples of revenue accounts:

• Sales
• Service fee revenues

Expense accounts

Expense accounts represent the expenses that your company has incurred. This generally includes all money spent on business activities with the hopes of generating a profit.

Expense accounts record the cost of doing business and include the following accounts:

• Salaries
• Rent
• Advertising
• Cost of goods sold

Non-operating or other income accounts

Non-operating or other income accounts refer to business income that’s unrelated to core business operations and generally takes place outside of day-to-day operations.

For example, your business might sell an asset that you’ve owned for years and record the revenue received from the sale of the asset in a non-operating income account.

Below are examples of non-operating or other income accounts:

• Gain on sale of assets
• Interest
• Loss on disposal of assets

How do you write a general ledger?

A general ledger contains the date and description of each transaction, along with a debit and credit side of a T-shaped visual depiction of the transaction. This model is known as a T-account. Follow these basic steps to write a general ledger:

1. Write the name of the account at the top of the page so it’s easy to find later on. Each account should have at least one entire page in the general ledger.
2. Add the account numbers below the account name in the general ledger.
3. When recording the transactions, go in chronological order to keep your financial records organized so it’s easy to find specific items by date.
4. In the description column, record what the transaction involves so you can easily keep track of all financial transactions.
5. Decide whether the account needs to be debited or credited. Assets and expenses increase on the debit side and decrease on the credit side of the T-account. Liabilities, equity, and revenue increase on the credit side and decrease on the debit side.

To balance the general ledger, the account balances of both your debits and your credits must be equal. If your ledger doesn’t balance, you’ll need to investigate and include appropriate adjusting entries at the end of the accounting cycle.

Let’s consider  an example: You receive $700 from a debtor on March 1. On March 15, you purchase goods with $200 cash. This is what the entries will look like in a general ledger.

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On March 1, the cash amount in your company’s bank account increases and is debited, while your debtor account is credited since your debtor now owes you less money. Buying goods on March 15 decreases the cash in the company and credits the cash account, but the amount of goods in your company increases and the goods account gets debited.

T-accounts are also useful for creating a visual representation of your transactions in the general ledger. Subsidiary ledgers, also known as sub-ledgers, help provide an understanding of the numbers in the general ledger by showing all the transactions associated with the account.

Compile your company’s financial transactions the right way

Running a business is often challenging if you’re wearing every hat without asking for help. Although accounting software may make bookkeeping easier, managing the process can still be a lot of work and take a lot of time.

That’s where Upwork can help. We’ll connect you to independent bookkeepers who are able to keep your company books up-to-date and correct, which will free up your time and energy to focus on other critical tasks and make important decisions based on accurate financial statements.

Find qualified, professional bookkeepers on Upwork today.