General Ledger 101 Definition, Terms, Types, and Templates

Each general ledger account in the chart of accounts is typically assigned a name and a unique code by which it can be identified. The retained earnings account is used to roll up your profit and loss balance into the retained profit account in the balance sheet at the end of the financial year. If you have more than one company in your org, and they all have different home currencies, you will need a retained earnings account for each company. Equity accounts show details in ownership interest of your business’s shareholders. Common stock, retained earnings, and additional paid-in capital are just three of the typical types of equity accounts in a GL. For each account, the general ledger shows the account balance at the beginning of the period, all credits and debits that hit the account during the period, and the ending balance.

Therefore, a general ledger contains individual accounts in which similar transactions are recorded, whether relating to an asset, a liability, an individual, or an expense. The best way to know if your general ledger is correct is to reconcile all entries then generate a trial balance to verify the completeness and ensure that debit balances equal credit balances. In the following article, we will explore more about general ledger accounting, and how you can use FreshBooks software to simplify your bookkeeping as you track your company’s finances. Broadly, the general ledger contains accounts that correspond to the income statement what is gl account and balance sheet for which they are destined.

She holds a Bachelor’s degree from UCLA and has served on the Board of the National Association of Women Business Owners. The GL is the backbone of all double-entry accounting systems—whether manual or automated. Assets are the resources your business owns, and these resources have the capacity to generate cash flows. Assets are items of economic value that can be converted into cash or cash equivalents. It is very important to have robust data backup and security processes to ensure all sensitive information is safe and not at all in jeopardy.

Odoo vs. Zoho Books: A detailed review

Alternatively, credits increase liability, revenue, and equity accounts and reduce asset and expense accounts. You no longer had to record general ledger in books; you could use Excel sheets and efficient accounting software. I have prepared more information about the bookkeeping ledgers which shows how the ledgers are split into debits and credits. A General Ledger account is simply an account used in your organization’s financial accounting system. Accounts are organized by type—asset, liability, equity, income, and expense accounts—and each account has a unique number.

For this transaction, the credit column will remain unchanged for this account. However, a separate ledger for the company’s accounts receivable will reflect a credit reduction for the same amount, because ABCDEFGH Software no longer has that amount receivable from its client. However, in recent decades they have been automated using enterprise accounting software and in enterprise resource planning applications. These tools integrate core accounting functions with modules for managing related business processes.

What is a General Ledger?

Meanwhile, liability accounts are used to track a company’s debts and obligations, such as loans and accounts payable. It is used to prepare financial statements and other important financial reports. The GL reconciliation process is critical because it ensures the accuracy of financial reporting and compliance with accounting standards.

Accounting 101 for Small Businesses

For instance, you could assign four-digit codes for all your accounts, or you could assign specific numbers to specific accounts. Unlike pperating expenses, the non-operating incomes and expenses are one-time incomes or expenses that you either earn or incur. Neither are an outcome of your core business activity, nor are such expenses related to your core business operations. The stockholder’s equity refers to the excess of assets over liabilities of your business. In other words, these are the assets remaining after you pay off all the debts and the liabilities. This equation states that the assets of your business are always equal to the sum of the owner’s capital and the claims of the outsiders.

Collecting Information for Financial Reports

A journal entry is a sequential list of accounting entries recording transactions while a GL is a formalized account system where recorded transactions in a journal are posted. The GL is a detailed record-keeping tool, while the P&L (profit and loss) or the income statement reports a company’s profit during a period. You can also use the information on a GL to verify the accuracy of financial statements during internal reviews and audits. The main types of ledger accounts include asset accounts, liability accounts, equity accounts, revenue accounts, and expense accounts.

It indicates specific groups of financial activity, including assets, liabilities, and revenue/expenses. This is more like the God of all ledgers because it has been part of accounting for decades now. This is where you keep an eye on transactions manually, entering debits and credits by hand or simple computer programs.

Should You Worry About Subsidiary Ledgers?

The income statement will also account for other expenses, such as selling, general and administrative expenses, depreciation, interest, and income taxes. The difference between these inflows and outflows is the company’s net income for the reporting period. General ledger reconciliation is where you compare the balances of GL accounts with external sources, like bank statements, customer invoices, etc.

The software also allows businesses to generate reports that provide a detailed view of their financial position. They allow for easy monitoring of account balances and can help identify errors or discrepancies in the subsidiary ledger. Control accounts are used to summarize information from the subsidiary ledger accounts. Subsidiary ledger accounts are used to record transactions related to individual customers or vendors. These accounts are also listed in the company’s balance sheet and represent the funds that the company’s owners have invested in the business.

• For example, an accounts receivable control account is used to summarize the transactions recorded in the accounts receivable subsidiary ledger.
• Neither are an outcome of your core business activity, nor are such expenses related to your core business operations.
• Each account within those categories contains a ledger and that ledger lists, usually in date order, all the transactions (money received or paid out) specific to that account.
• This could include purchases, sales, salaries, and any other type of income or expenditure.

During the bookkeeping process, other records outside the general ledger, called journals or daybooks, are used for the daily recording of transactions. The general journal consists of the accounting entries for each business transaction that occurred in order by date. A general ledger almost resembles a T-shaped account with entries on debit and credit sides. While debits show an increase in assets or expenses, credits indicate a decrease in assets (or, often, a boost in liabilities or revenue). The General Ledger Account is a fundamental concept in accounting that helps organizations keep track of their financial transactions. It serves as a central repository for all financial records and transactions, providing a comprehensive view of an organization’s financial health.

For example, a CPA might use a T-account — named because of its physical layout in the shape of a T — to track just the debits and credits in a particular general ledger account. In this instance, one asset account (cash) is increased by $200, while another asset account (accounts receivable) is reduced by $200. The net result is that both the increase and the decrease only affect one side of the accounting equation.