What is a general ledger?

The general ledger (GL) is a fundamental tool in accounting that’s key to understanding your business’s financial health. The GL is the foundation of your company's double-entry accounting system, providing a comprehensive record of all financial transactions in your business. It’s the central repository that reflects your business's financial history.

Whether you're new to business finance or looking to deepen your understanding, understanding the general ledger will equip you to navigate your company's financial landscape better.

Understanding the general ledger

The general ledger represents the record keeping system for your company’s financial data, including debit and credit account records that are validated and reconciled by a trial balance. You record each financial transaction your company partakes in and use it to prepare your financial statements.

Think of the general ledger as a detailed diary, where you aggregate transaction data into accounts for assets, liabilities, equity, revenues, and expenses. For instance, when you make a sale, this transaction increases your assets (cash or accounts receivable) and your revenue. Similarly, when you purchase supplies, the ledger records a decrease in cash (asset) and an increase in expenses.

The general is your foundation for preparing accurate financial statements. These statements include the balance sheet, income statement, and cash flow statement. Each of these financial statements allows stakeholders to assess your company’s financial health.

For example, investors might examine the balance sheet to understand asset value compared to liabilities. Managers might look at the income statement to gauge the operational efficiency of your business.

How the GL works

Here’s how the process lays out:

1. Post transactions to individual sub-ledger accounts (as defined in the chart of accounts)
2. Close out sub-ledgers and summarize them into the GL
3. The GL accountant generates a trial balance (TB) report
4. The GL accountant checks for any errors and posts any applicable adjusting entries. At the end of the period, the TB must balance to $0.
5. Use the modified TB report to generate financial statements

Double-entry accounting and the general ledger

Double-entry accounting is a fundamental principle that ensures every financial transaction affects two different accounts in equal and opposite ways, maintaining the balance for the basic accounting equation.

Assets = Liabilities + Equity

You record transactions through "journal entries," each of which contains at least one debit and one credit line item. You must make sure these entries balance; if they don’t, it signals a discrepancy that needs correction. Accuracy here is vital. An error in a journal entry, such as misclassifying an expense or overlooking a transaction, can skew your company’s entire financial outlook.

Journal entries are the building blocks of the general ledger. The general ledger is a collection of all these entries, aggregated and organized into a comprehensive record. While a journal entry records a single transaction (debits and credits), the general ledger accumulates all these transactions and provides a broader view of your company’s financial activities.

It’s analogous to comparing a single puzzle piece to the completed puzzle picture that emerges once you’ve assembled all of the pieces.

You do this to help accountants, management, analysts, and other stakeholders see how your company is performing. Although the financial data won't tell the entire story of your business performance, it'll provide insights into how you allocate capital and whether you need to address any errors.

For instance, if your expenses spike in a given period or revenues appear unusually high, given the number of transactions, it's imperative to review the GL and dig into each recorded transaction to locate the issue. This may include spending hours reviewing journal entries during a close period to find the erroneous transactions.

Getting the entries correct, having strong controls around recurring entries, and good communication around one-off transactions are all crucial to accurate financial records. The process looks like this:

Journal entries → Sub-ledger → General ledger → Trial balance → Adjusting entries → Adjusted trial balance → Financial statements (balance sheet, income statement, statement of cash flow)

General ledger components

A general ledger, the cornerstone of your company’s financial system, consists of four main components. Each of these plays a vital role in supporting the accuracy and completeness of your financial records.

These components work together to create a comprehensive picture of your financial activities, allowing for effective tracking as well as analysis and reporting. By understanding each component and its function, you can better manage your financial operations and make informed decisions based on reliable data.

These components are:

1. Journal entries: Information about each journal entry posted to an account with the entry date
2. Description: A brief summary of the transaction
3. Debit and credit columns: Each journal entry line item is posted as a debit or credit
4. Balance: Each account maintains an ongoing balance. At the end of the accounting period, you calculate the ending balance and add it to the trial balance.

Account categories in a general ledger system

The general ledger (GL) categorizes all financial transactions into five main account types. Understanding these is key to seeing how your business tracks its financial activities and maintains its books.

Assets

This category includes all resources owned by the company that have economic value. Assets can be tangible, such as buildings and machinery, or intangible, such as patents or trademarks. Assets are crucial for generating revenue and assessing your company’s financial strength.

Examples of asset accounts include:

• Cash and cash equivalents
• Accounts receivable
• Fixed assets
• Inventory
• Investments
• Intangible assets (patents/trademarks)

Liabilities

Liabilities are the debts or obligations your company owes to others. This can include short-term liabilities, which are to be paid within the year, and long-term liabilities, which you’ll pay a year or more in the future. They are critical for understanding your solvency and financial commitments.

Liability account examples include:

• Accounts payable
• Leases
• Bank loans
• Payroll
• Taxes

Equity

Equity accounts track the owner’s stake in your company. This includes any initial investments, retained earnings, and stock issued or outstanding. Equity is a key indicator of the financial health and value of the business to its owners. It also helps illustrate the overall ownership structure of your business.

Equity account examples include:

• Common stock
• Owner's equity
• Retained earnings
• Treasury stock

Revenue

This category records all income generated by the business, typically from sales of goods or services. It is a primary measure of a business’s financial performance and ability to generate profit. Revenue can represent an increase in a company's assets or a decrease in its liabilities.

Revenue account examples include:

• Interest income
• Royalties
• Sales

Expenses

Expenses are all costs incurred in the process of generating revenue. This includes both direct costs, such as cost of sales, and indirect costs, such as operating expenses. Tracking expenses is vital for managing the profitability and efficiency of your business.

Examples of expense accounts include:

• Cost of sales
• Advertising
• Salaries
• Rent and utilities

Sub-ledgers and the general ledger

A sub-ledger—or subsidiary ledger—is a detailed subset of a GL account. While the general ledger provides a summary of all financial transactions, sub-ledgers are used to track specific financial transactions for different accounts in more detail.

For example, an accounts receivable sub-ledger might track individual customer balances, while the accounts payable sub-ledger will monitor what a company owes to its suppliers.

Each sub-ledger contains a chart of accounts specific to its area. In the accounts receivable sub-ledger, you'll find transactions related to sales, collections, and outstanding invoices. Similarly, the accounts payable sub-ledger will include transactions related to bills, payments to vendors, and amounts due.

These sub-ledgers make it easier to monitor and manage account balances within specific areas without overloading the general ledger with too much detail.

Once you’ve recorded transactions in the sub-ledgers, you periodically summarize and transfer them into the GL. This process ensures that the general ledger maintains accurate and up-to-date financial data, while also simplifying the recordkeeping process.

When you maintain detailed subsidiary ledgers, you can more easily track specific transactions without overwhelming your GL.

Journal entry examples

GL accountant job description

The role of a GL Accountant is central to the financial integrity and clarity of a business. These professionals are typically the gatekeepers of financial accuracy. Their job is to ensure that every number reported is not just correct, but meaningful in telling the financial story of your company.

Their responsibilities begin with the meticulous recording and reviewing of all journal entries. This step is fundamental, as these entries form the basis of financial data in your general ledger. Each debit and credit should be scrutinized for accuracy to ensure the transaction is recorded in the correct accounts.

The GL accountant ensures these transactions correctly reflect your company’s financial activities and adhere to the applicable accounting principles.

The GL accountant is also responsible for managing the general ledger. This involves overseeing the entire ledger, ensuring it is up-to-date and accurate. This is a continuous process that requires a comprehensive understanding of your business’s financial operations.

Performing reconciliations is also a significant part of the GL accountant’s job. This involves verifying the accuracy of the information in the general ledger against other independent records such as bank statements or other financial documents.

Reconciliation helps to identify and rectify discrepancies, making sure your financial reporting is reliable.

Finally, GL accountants play a crucial role in the preparation of your financial statements—your company’s balance sheet, income statement, and cash flow statement.

The GL accountant works with the controller or CFO to make sure these statements accurately represent your company’s financial status based on the data recorded in the general ledger.

The GL accountant: Responsibilities overview

Duties of a GL accounting include:

• Recording transactions: GL accountants record financial transactions in the general ledger, making sure each entry is accurate and appropriately classified
• Reconciliation: GL accountants reconcile ledger accounts, making sure the balances match with related financial records, such as bank statements
• Financial reporting: Financial statement prep relies on the GL accounting, including the balance sheet, income statement, and cash flow statement. This process ensures the data in these statements accurately reflects the ledger entries.
• Audit support: GL accountants help in audit processes by providing ledger data and supporting documentation, guaranteeing compliance with accounting standards and regulations
• Budgeting and forecasting: They often contribute to budget preparation and financial forecasting, using ledger data to analyze trends and project future financial performance

GL accountants’ general ledger capabilities

The skill set of a GL accountant is a blend of technical expertise and soft skills:

• Attention to detail: Ledger management is all about precision. A small error can have a ripple effect on financial reports.
• Analytical skills: GL accountants must be adept at analyzing financial data to identify trends, inconsistencies, and areas of concern
• Knowledge of accounting principles: It's crucial to have a thorough understanding of Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS), or any additional reporting framework
• Proficiency in accounting software: Modern GL accounting relies heavily on business expense trackers and other software. Proficiency in programs such as Ramp, QuickBooks, SAP, or NetSuite is often vital to success.
• Communication skills: GL accountants must effectively communicate financial information to other departments, managers, and external stakeholders

GL accountant salary expectations

According to Indeed.com, the average US salary for a general ledger accountant is $69,991.

To qualify for a GL accountant job, one must typically have a bachelor's degree in accounting or a related field, plus 2 to 5 years of related experience.

Working in this role can give an individual the crucial experience and skills to grow into an organization's accounting manager or controller position.

Beyond the balance: The crucial role of a general ledger

General ledger accounting is much more than just keeping financial records; it tells your business's fiscal narrative. It is the backbone of your company's financial infrastructure, providing invaluable insights into its economic health and guiding vital strategic decisions.

Every entry in the general ledger contributes to a broader understanding of your company's economic condition. It’s like a financial compass, guiding you through the complexities of your performance and strategy via cash flow trends, revenue generation, expense management, and overall profitability.

This offers a clear and quantifiable view of your financial standing at any given moment, influencing critical business decisions such as investments, budget allocations, and long-term strategic planning.

The general ledger also reflects real-time financial data, enabling more dynamic and responsive decision-making. With advancements in accounting software, general ledger accounting has evolved from mere bookkeeping into a powerful analytical tool, offering greater forecasting capabilities.

Keep a pristine general ledger with Ramp

Efficiently managing your general ledger is crucial for accurate financial reporting and decision-making. By automating your accounting processes with Ramp, you can eliminate manual errors, streamline data entry, and ensure your financial records are always up to date.

Ramp’s accounting automation software integrates your financial data, helping you maintain accurate general ledger accounts and quickly generate comprehensive financial reports. With powerful automation, you can reduce the time spent on manual reconciliation and focus on driving business growth.

Let Ramp handle the tedious tasks while you gain real-time insights into your company’s financial health and improve your overall financial performance.