Your business diary holds all the secrets. We aren’t talking about water cooler gossip, something even juicier—the keys to your success are in your general ledger. And with good general ledger accounting practices, you get prime financial information to drive action.
In this article
- What is a general ledger?
- General ledger vs general journal
- What are sub ledger accounts and T accounts?
- The accounting cycle
- General ledger reconciliation
What Is A General Ledger?
Since the dawn of accounting, people have been tracking business transactions. These transactions used to be recorded on stone, then paper, and now the cloud in a handy tracker called the general ledger. It is the master copy that consolidates all your financial ins and outs into your chart of accounts.
General Ledger: Double Entry Accounting vs Single Entry
In double-entry accounting, you are balancing the accounting equation (Assets = Liabilities + Equity). To balance the equation, you enter a transaction into the books with a debit and a credit to at least two accounts. This is to monitor what came in and what went out of your business for each entry. Debits and credits are always equal, to balance the accounting equation, so that what you own (assets) is always equal to what you owe (liabilities) plus what you have invested in the business (equity).
You are constantly balancing debits and credits in your general ledger accounts. With a double-entry system, you catch errors earlier because there will be the same imbalance happening in multiple accounts. Any mistakes will show up in your sub-ledgers and will need to be adjusted. Continual maintenance of general ledger accounting procedures helps you fix errors before they get out of hand.
Double Entry Accounting Debits And Credits Example
You are starting a SaaS company and you need to pay for software hosting. You pay a monthly premium of $300 for a hosting subscription.
In double-entry accounting, you make two entries, one in your utilities (expense) account and one in a cash (asset) account. Since you received hosting for your software, that is a debit; you paid for it from your cash account, that is a credit. Both accounts are decreasing, assets and liabilities are equal so the accounting equation remains in balance.
In double-entry accounting systems, the general ledger is a running tab of credits and debits informing financial reporting. By reviewing how items affect your accounts you avoid overspending and can visualize profitability down to the grain. Reconciling the general ledger throughout the year lends to big-picture thinking for your business.
In single-entry accounting, you still have a general ledger, but it isn’t too valuable. Single entry accounting means you are entering transactions as they occur, basically you are listing something as it comes in or leaves the business. You can still organize these transactions into accounts, and “reconcile” the general ledger. But since you are NOT balancing debits and credits, your financial statements show your current cash position only, which can be off if a reporting error occurred.
What Are Sub Ledger Accounts?
Sub ledgers are like filing drawers for your general ledger. Sub ledger accounts manage a high volume of transactions linked to a specific type of financial account. You can see a sub ledger composed of multiple accounts dealing with the same type of financial data.
For Example: your accounts receivable sub ledger will have accounts receivable, and contra accounts like bad debt expense account and/ or a doubtful debt reserve account.
Sub ledgers organize the general ledger into 5 different types: assets, liabilities, equity, revenue, and/or expense accounts. All accounts follow your chart of accounts, which is specific to your industry. These are the sub-ledgers that most businesses use:
- Accounts receivable
- Accounts payable
- Sales tax
The Difference Between A General Ledger And A General Journal?
A journal is the same as a sub ledger. In traditional accounting, when a business performed a monetary action (spending, earning a sale, etc), it was first recorded in its designated paper book or journal, then was summarized later in the general ledger book. The general journal was a book for random entries that didn’t fall into any specific sub-journal. These transactions tended to be one-off transactions; irregularities in daily operations. In this sense, the general journal was subsidiary to the general ledger and was summarized, along with other sub-journals, in the general ledger.
Note: with advanced cloud accounting software, paper journals are seldom used. Computing software now categorizes transactions from your general ledger straight to your business accounts, so now, your accounts are like journals.
What Are T Accounts?
T accounts are your ledger accounts. It is a nickname for how ledgers were visually drawn on paper to show credits and debits. Grab a pencil and write a large letter T on a piece of paper, with the name of an account on top of the T, and the middle of the T breaking the left column labeled debit from the right column labeled credit. T accounts was a term used when balancing debits and credits in general ledger accounts.
The Accounting Cycle: Breaking Down A General Ledger Reconciliation
In accrual accounting, we follow a process called the accounting cycle for a general ledger reconciliation. If done correctly the accounting cycle facilitates accurate general ledger accounting and financial reporting. The accounting cycle is comprised of these 9 steps:
- Transaction Identification: labeling a transaction as an asset, liability, equity, revenue, and/or expense.
- Journal Entries: entering and itemizing transactional data into the appropriate accounts.
- Review Ledger Accounts: double-checking all transactions are entered into sub ledger accounts and reconciling all third-party financial data.
- Unadjusted Trial Balance: Summarizing balances of all general ledger accounts.
- Adjusting Entries: performing adjustment entries to general ledger accounts to correct errors and accrue items outside of the reporting period.
- Adjusted Trial Balance: reviewing that your working trial balance matches your actual revenue and expenses from all external sources, and summarizing everything that is occurring within the period.
- Draft Financial Statements: reporting general ledger account balances on your income statement, balance sheet, and cash flow statement.
- Closing Entries: inputting summary entries to the general ledger to lock reporting for the period.
- Post Trial Balance: opening balances for the next period are reported to all accounts.
What Is A General Ledger Report?
A general ledger report displays account summary balances for review in the accounting cycle. Depending on how you do accounting and reporting, will determine how it is formatted. Typically you will see all transactions in the general ledger, organized by account first, then by when they occurred within a specified timeframe. A general ledger report is a great tool to use when performing steps 4 and 6 in the accounting cycle above
What Is A General Ledger Reconciliation?
To produce financial statements you need to perform a general ledger reconciliation monthly, quarterly, or annually. A reconciliation of the general ledger is a summary of all your transactions in a reporting period. For a general ledger reconciliation, you are matching all bank statements, credit cards, bills, etc, to what is recorded in your accounting system. Then, you summarize your sub ledgers to produce a working trial balance of the general ledger.
Once your general ledger trial balance is verified, a summary level entry is made to the general ledger, stating revenue earned for the period. Then all general ledger accounts are locked, the reporting period ends, and a new reporting period begins. The final numbers from the general ledger reconciliation will feed your income statement, balance sheet, and cash flow statement.
Insights From A General Ledger
The general ledger is used to record transactions in granular detail. By performing a general ledger reconciliation you summarize the business financials for a period. If financial statements are a window into the business, the general ledger is like walking through the front door. It will provide the answer to why you are in a certain financial position.
Part of our month-end closing is performing flux analysis. In flux analysis, we compare large fluctuations on the Profit & Loss Statement and Balance Sheet, between the previous reporting period and the current period. To do this, we take a deep dive into the general ledger and sub-ledger accounts to explain increasing or decreasing line items. So, good recording in the general ledger solidifies our accounting procedures as an accurate and transparent depiction of revenue and expenditures.
Never Underestimate The Power Of General Ledger Accounting
In double-entry accounting, your general ledger is your business diary. It holds all the keys to your operations because it is where all your transactions are recorded. With accurate data entry, and general ledger account maintenance via reconciliations, you build a solid financial foundation. If you are getting lost in your ledgers, and need someone to take over the accounting cycle, tap into our white glove accounting services.