General Ledger Definition - Investopedia

A general ledger is a record-keeping system for a company's financial data, with debit and credit account records validated by a trial balance. TableofContents Expand TableofContents WhatIsaGeneralLedger? HowItWorks ItsRoleinDouble-EntryAccounting WhatItTellsYou BalanceSheetExample IncomeStatementExample GeneralLedgerFAQs CorporateFinance&Accounting Accounting Partof TheEvolutionofAccountingandAccountingTerminology PartOf TheEvolutionofAccountingandAccountingTerminology ExploreTheGuide Overview TermsA-B Overview AbsorptionCosting Amortization AverageCollectionPeriod BillofLading TermsC Overview CashBook CostofDebt CostofEquity Cost-Volume-Profit(CVP)Analysis CurrentAccount TermsD-E Overview DaysPayableOutstanding Depreciation DoubleDecliningBalanceDepreciationMethod EBITDA EconomicOrderQuantity TermsF-M Overview FactorsofProduction FiscalYear(FY) GeneralLedger JustinTime(JIT) TermsN-O Overview NetOperatingLoss(NOL) NetRealizableValue(NRV) NoncurrentAssets OperatingCost OperatingProfit TermsP-S Overview ProductionCosts ProFormaInvoice RetainedEarnings RevenueRecognition SunkCost TermsT-Z Overview TripleBottomLine(TBL) VariableCost Work-in-Progress(WIP) Write-Off Year-Over-Year(YOY) Zero-BasedBudgeting(ZBB) WhatIsaGeneralLedger? Ageneralledgerrepresentstherecord-keepingsystemforacompany’sfinancialdata,withdebitandcreditaccountrecordsvalidatedbyatrialbalance.Itprovidesarecordofeachfinancialtransactionthattakesplaceduringthelifeofanoperatingcompanyandholdsaccountinformationthatisneededtopreparethecompany’sfinancialstatements.Transactiondataissegregated,bytype,intoaccountsforassets,liabilities,owners’equity,revenues,andexpenses. KeyTakeaways Thegeneralledgeristhefoundationofacompany’sdouble-entryaccountingsystem.Generalledgeraccountsencompassallthetransactiondataneededtoproducetheincomestatement,balancesheet,andotherfinancialreports.Generalledgertransactionsareasummaryoftransactionsmadeasjournalentriestosub-ledgeraccounts.Thetrialbalanceisareportthatlistseverygeneralledgeraccountanditsbalance,makingadjustmentseasiertocheckanderrorseasiertolocate. 1:37 GeneralLedger HowaGeneralLedgerWorks Ageneralledgeristhefoundationofasystememployedbyaccountantstostoreandorganizefinancialdatausedtocreatethefirm’sfinancialstatements.Transactionsarepostedtoindividualsub-ledgeraccounts,asdefinedbythecompany’schartofaccounts. Thetransactionsarethenclosedoutorsummarizedtothegeneralledger,andtheaccountantgeneratesatrialbalance,whichservesasareportofeachledgeraccount’sbalance.Thetrialbalanceischeckedforerrorsandadjustedbypostingadditionalnecessaryentries,andthentheadjustedtrialbalanceisusedtogeneratethefinancialstatements. HowaGeneralLedgerFunctionsWithDouble-EntryAccounting Ageneralledgerisusedbybusinessesthatemploythedouble-entrybookkeepingmethod,whichmeansthateachfinancialtransactionaffectsatleasttwosub-ledgeraccounts,andeachentryhasatleastonedebitandonecredittransaction.Double-entrytransactions,called“journalentries,”arepostedintwocolumns,withdebitentriesontheleftandcreditentriesontheright,andthetotalofalldebitandcreditentriesmustbalance. Theaccountingequation,whichunderliesdouble-entryaccounting,isasfollows: Assets − Liabilities = Stockholders’ Equity \text{Assets}-\text{Liabilities}=\text{Stockholders'Equity} Assets−Liabilities=Stockholders’ Equity Thebalancesheetfollowsthisformatandshowsinformationatadetailedaccountlevel.Forexample,thebalancesheetshowsseveralassetaccounts,includingcashandaccountsreceivable,initsshort-termassetssection. Thedouble-entryaccountingmethodworksbasedontheaccountingequation’srequirementthattransactionspostedtotheaccountsontheleftoftheequalsignintheformulamustequalthetotaloftransactionspostedtotheaccount(oraccounts)ontheright.Eveniftheequationispresenteddifferently(suchasAssets=Liabilities+Stockholders’Equity),thebalancingrulealwaysapplies. WhatDoesaGeneralLedgerTellYou? Thetransactiondetailscontainedinthegeneralledgerarecompiledandsummarizedatvariouslevelstoproduceatrialbalance,incomestatement,balancesheet,statementofcashflows,andmanyotherfinancialreports.Thishelpsaccountants,companymanagement,analysts,investors,andotherstakeholdersassessthecompany’sperformanceonanongoingbasis. Whenexpensesspikeinagivenperiod,oracompanyrecordsothertransactionsthataffectitsrevenues,netincome,orotherkeyfinancialmetrics,thefinancialstatementdataoftendoesn’ttellthewholestory.Inthecaseofcertaintypesofaccountingerrors,itbecomesnecessarytogobacktothegeneralledgeranddigintothedetailofeachrecordedtransactiontolocatetheissue.Attimesthiscaninvolvereviewingdozensofjournalentries,butitisimperativetomaintainreliablyerror-freeandcrediblecompanyfinancialstatements. ABalanceSheetTransactionExample Ifacompanyreceivespaymentfromaclientfora$200invoice,forexample,thecompanyaccountantincreasesthecashaccountwitha$200debitandcompletestheentrywithacredit,orreduction,of$200toaccountsreceivable.Theposteddebitandcreditamountsareequal. Inthisinstance,oneassetaccount(cash)isincreasedby$200,whileanotherassetaccount(accountsreceivable)isreducedby$200.Thenetresultisthatboththeincreaseandthedecreaseonlyaffectonesideoftheaccountingequation.Thus,theequationremainsinbalance. AnIncomeStatementTransactionExample Theincomestatementfollowsitsownformula,whichcanbewrittenasfollows: WhatIsthePurposeofaGeneralLedger? Inaccounting,ageneralledgerisusedtorecordallofacompany’stransactions.Withinageneralledger,transactionaldataisorganizedintoassets,liabilities,revenues,expenses,andowner’sequity.Aftereachsub-ledgerhasbeenclosedout,theaccountantpreparesthetrialbalance.Thisdatafromthetrialbalanceisthenusedtocreatethecompany’sfinancialstatements,suchasitsbalancesheet,incomestatement,statementofcashflows,andotherfinancialreports.  IsaGeneralLedgerPartoftheDouble-EntryBookkeepingMethod? Yes,acompanythatusesadouble-entrybookkeepingmethodusesthegeneralledgermethodofstoringcompanyfinancialdata.Specifically,double-entrybookkeepingiswheneachtransactionimpactsatleastonedebitandonecredittransaction.Inotherwords,eachtransactionappearsintwocolumns,adebitcolumnandacreditcolumn,whosetotalsmustbalance.Underthisbalancingrule,thefollowingequationapplies:Assets-Liabilities=Stockholders’Equity. WhatIsanExampleofaGeneralLedgerEntry? Considerthefollowingexamplewhereacompanyreceivesa$1,000paymentfromaclientforitsservices.Theaccountantwouldthenincreasetheassetcolumnby$1,000andsubtract$1,000fromaccountsreceivable.Theequationremainsinbalance,astheequivalentincreaseanddecreaseaffectoneside—theassetside—oftheaccountingequation.  ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. IntuitQuickbooks."WhatisaGeneralLedgerandWhyisItImportant?" CFAInstitute."UnderstandingIncomeStatements." CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. Provider Name Description PartOf TheEvolutionofAccountingandAccountingTerminologyGuide HowDidtheFieldofAccountingEvolve? 1of35 WhatIsAbsorptionCosting? 2of35 AmortizationFormulaandCalculation 3of35 WhatIsanAverageCollectionPeriod? 4of35 BillofLading 5of35 CashBook 6of35 HowtoCalculateCostofDebt 7of35 WhatIstheCostofEquity? 8of35 Cost-Volume-Profit(CVP)Analysis 9of35 WhatIstheCurrentAccount? 10of35 UnderstandingDaysPayableOutstanding(DPO) 11of35 UnderstandingDepreciation 12of35 HowtheDoubleDecliningBalance(DDB)DepreciationMethodWorks 13of35 EarningsBeforeInterest,Taxes,Depreciation&Amortization(EBITDA) 14of35 EconomicOrderQuantity(EOQ) 15of35 WhatAreFactorsofProduction? 16of35 WhatDefinesaFiscalYear? 17of35 HowGeneralLedgersWork 18of35 WhatIsJust-in-Time(JIT)? 19of35 NetOperatingLoss(NOL) 20of35 NetRealizableValue(NRV) 21of35 WhatAreNoncurrentAssets? 22of35 WhatAreOperatingCosts? 23of35 WhatIsOperatingProfit? 24of35 WhatAreProductionCosts? 25of35 ProFormaInvoiceDefinition 26of35 WhatAreRetainedEarnings? 27of35 RevenueRecognitionAsanAccountingPrinciple 28of35 WhatIsaSunkCost? 29of35 TripleBottomLine(TBL) 30of35 WhatIsaVariableCost? 31of35 WhatWork-in-ProgressReallyMeans 32of35 WhatIsaWrite-OffinBusinessAccounting? 33of35 WhatDoesYear-Over-Year(YOY)Mean? 34of35 Zero-BasedBudgeting(ZBB) 35of35 RelatedTerms AccountingError Anaccountingerrorisanerrorinanaccountingentrythatwasnotintentional,andwhenspottedisimmediatelyfixed. more AccountingCycle Theaccountingcyclerecordsandanalyzesaccountingeventsrelatedtoacompany'sactivities. more WhatIstheAccountingEquation? Theaccountingequationdefinesacompany'stotalassetsasthesumofitsliabilitiesandshareholders'equity. more AccountingDefinition Accountingistheprocessofrecording,summarizing,analyzing,andreportingfinancialtransactionsofabusinesstooversightagencies,regulators,andtheIRS. more WhatIsReconciliationinAccounting? Reconciliationisanaccountingprocessthatcomparestwosetsofrecordstocheckthatfiguresarecorrect,andcanbeusedforpersonalorbusinessreconciliations. more WhatIsAccountReconcilement? Accountreconcilementistheprocessofconfirmingthattwoseparaterecordsoftransactionsinanaccountareequal. more PartnerLinks RelatedArticles Accounting LearnAboutthe8ImportantStepsintheAccountingCycle Accounting HowtoCalculateCreditandDebitBalancesinaGeneralLedger FundamentalAnalysis BalanceSheetvs.ProfitandLossStatement:What’stheDifference? Accounting ReportingRequirementsofContingentLiabilitiesandGAAPCompliance Accounting TheDifferenceBetweenaGeneralLedgerandaGeneralJournal Accounting WhatIsDoubleEntryBookkeepingandHow'sItFitinGeneralLedger?