What Is General Ledger Accounting?

While it might seem hard to understand at first, general ledger accounting is a bookkeeping method that can help you understand your business better.

What Is General Ledger Accounting?

General ledger accounting is a method of financial recordkeeping that records debits and credits for all transactions over a certain period. Small businesses that do accounting in this way record every financial transaction in a general ledger.

By granularly recording every single financial transaction, a general ledger provides a big picture sense of a company’s financial situation. At the heart of a general ledger is a system of double-entry accounting. In this system, every transaction is recorded twice, as a credit in one account and a debit in another. By doing this accurately, your general ledger will always be balanced.

You use general ledger accounting to keep an ongoing log of all your financial records. The data from a general ledger is used to create other critical business documents, including profit & loss statements and balance sheets.

What Is Double-Entry Accounting?

Double-entry accounting can seem counterintuitive at first but comes easily with practice. This system will be necessary to understand if you want to do general ledger accounting.

You will need to define your business’s various accounts for both expenses and revenues. For some companies, there can be hundreds of different accounts. Common account types for small businesses include current assets, fixed assets, current liabilities, fixed liabilities, revenue from sales, business expenses, and petty cash.

You should keep a journal of every single business transaction—every sale, purchase, and bill payment. You should date and note which account the transaction falls under. Some prefer to assign a number to each transaction for simplicity.

How Do You Do Double-Entry Accounting?

To fill out a double-entry account book, note the date and transaction description for each transaction.

Now you must debit and credit 2 different accounts for the amount of the transaction. Because you are crediting and debiting the same amount, the book will balance out.

For example, say you buy a $20,000 vehicle for your business. You would note that your assets increase by $20,000—it counts as a credit because you added a $20,000 vehicle to your business. If you paid for the vehicle all in cash, you would note that you debited your expense account by $20,000. In this way, the balance stays at 0.  

What Are the Components of a General Ledger?

A general ledger usually includes the journals containing all the business’s transactions as well as the double-entry ledger that balances the accounts out. As your business grows and accounts become more complicated, you may opt to keep sub-ledgers that then feed into your general ledger.

These journals and ledgers don’t need to be physical—it is common and easy to do everything with accounting software.

Why Should You Care?

While general ledger accounting might not sound glamorous, these records hold the key for creating accurate income statements, balance sheets, and other necessary business documents. Additionally, a general ledger becomes critical during tax time.

SHARE