A general ledger is a set of accounts used by a business to keep track of all the financial transactions the company makes. All financial transactions are recorded, or "posted," in the general ledger, whether or not they post to a subsidiary ledger (sub-ledger), such as accounts receivable or cash. These values can provide the information used to generate all of a company's financial statements.
At least five types of accounts make up the general ledger: assets, liabilities, owner's equity, revenue, and expense; often, gains and losses are also included. In double-entry bookkeeping, when a transaction occurs, it always affects two of these accounts in equal and opposite ways; it is a debit to one and a credit to another. The total amount of debits should always equal the total amount of credits, so if the two do not match up, it indicates that an error has been made. This comprehensive and balanced format is one reason why the general ledger accounts are used to create financial statements.
As the main accounting record, the general ledger is created first. It is organized by account, with each numbered in a series, based on what that account is used for. This numbering sequence allows information to be found quickly and easily, and is a common business practice. The numbers are usually five to six digits long. The list of all the accounts in the general ledger is called a chart of accounts, and typically includes between 20 and 30 entries.
Sub-ledgers are created to simplify the general ledger and keep track of a specific type of transaction, providing more detail about those transactions. Common sub-ledgers include accounts receivable, accounts payable, cash, and sales. The multiple daily transactions are recorded within these sub-ledgers, and the final, summary value is posted into the general ledger.
Originally, the general ledger was a physical book used to manually record a company's transactions. An important part of double-entry bookkeeping, the concept behind this is that there is always a positive and negative value to every transaction. This is a common accounting system used around the world. The strict rules and dependencies built into the double-entry accounting process meant that they were some of the first business processes to become computerized.
Computerized accounting systems allow companies to create very large lists of ledger accounts while still keeping them organized and easy to access. In many cases, systems are set up to automatically feed the correct data into the appropriate financial statement reports. Reports can be run to provide regular updates on the company's financial position.
Setting up the general ledger chart of accounts is usually the first task to be completed when installing any computerized accounting software package. A standard chart of accounts is typically included in these software packages, with multiple options for a wide range of industries. Not all companies will need to use all available accounts, however, and should choose only those appropriate for their needs.
The general ledger should not be confused with the general journal, which provides a more formal, chronological list of a company's financial transactions. These transactions are recorded in the general journal first, and typically include more information than is included in the ledger; the balance of each account is not included. As in the general ledger, however, the credits and debits listed in the general journal must total zero.
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