General Ledger

What Is a General Ledger?
A general ledger is a company’s central record-keeping system for financial transactions. It organizes transactional data into accounts—assets, liabilities, equity, revenues, and expenses—and provides the balances needed to prepare financial statements.

Key Takeaways
* The general ledger is the foundation of double-entry accounting.
* It consolidates transactions from sub-ledgers and journal entries.
* The trial balance lists each ledger account and its balance, helping detect and correct errors before financial statements are prepared.
* Detailed ledger entries allow stakeholders to verify and investigate reported results.

How It Works
Transactions are first recorded as journal entries and posted to sub-ledger accounts defined by the company’s chart of accounts. Those sub-ledger totals are summarized in the general ledger. From the general ledger, accountants prepare a trial balance—a report of all account balances. The trial balance is reviewed and adjusted as needed; the adjusted balances are then used to produce financial statements.

Double-Entry Accounting
The general ledger operates under double-entry bookkeeping: every transaction affects at least two accounts and includes at least one debit and one credit. The total debits must equal total credits for the books to balance. This approach enforces the accounting equation:
Assets − Liabilities = Stockholders’ Equity

Because each transaction impacts both sides of the equation (directly or indirectly), the balance sheet remains in balance after every entry.

What the General Ledger Reveals
Compiled and summarized ledger data feed into:
* Balance sheet
* Income statement
* Statement of cash flows
* Other financial reports

Beyond summary figures, the ledger provides transaction-level detail that helps accountants, management, auditors, analysts, and investors investigate anomalies—such as unexpected expense spikes—or verify the accuracy of reported numbers.

Practical Examples
Balance sheet example
If a customer pays a $200 invoice:
* Debit Cash +$200 (asset increase)
* Credit Accounts Receivable −$200 (asset decrease)
Both entries affect asset accounts and offset each other, keeping the accounting equation balanced.

Income statement example
When a sale occurs:
* Sales receipts are recorded in net sales.
* Cost of goods sold is subtracted from net sales to determine gross profit.
* Operating expenses (SG&A), depreciation, interest, and taxes are then applied to arrive at net income for the period.

Purpose and Benefits
A general ledger:
* Records a company’s ongoing transactions in a structured way.
* Supports preparation of accurate financial statements.
* Enables internal and external stakeholders to assess financial performance and position.
* Facilitates auditing, error detection, and financial analysis by providing detailed supporting data.

Investor Tip
To verify financial reporting, review supporting documents and footnotes in addition to summary financial statements. The ledger and underlying source documents can help explain unusual fluctuations or one-time items.

Common Questions
Is a general ledger required for double-entry bookkeeping?
Yes. Double-entry bookkeeping uses the general ledger to record debits and credits so totals remain balanced.

How does the trial balance fit in?
The trial balance lists all ledger account balances. It’s used to check for errors and to prepare the adjusted balances that feed financial statements.

Bottom Line
The general ledger is the core accounting record that organizes transactional data into accounts used to generate financial statements. Its structure and the double-entry method help ensure accurate, transparent financial reporting and provide the detail necessary for analysis and verification.