How a General Ledger Works With Double-Entry Accounting Along With Examples

On January 31, after all of the cash journal entries post, the general ledger lists the ending cash balance. Account #1000 is the cash account, and is a partial listing of the general ledger for January 2024. Separating these accounts from the main ledger removes a large amount of detail and allows different staff to work on different aspects of the accounting records. Only the final three columns debit, credit, and balance include monetary amounts.

A Balance Sheet Transaction Example

Accounts are usually listed in the general ledger with their account numbers and transaction information. For example, the asset accounts could contain cash in hand, cash in the bank, accounts receivable, prepaid expenses, real estate, machinery, and inventory. This guide will give you the information you need to interpret it, including what details it contains, its role in the double-entry accounting system, and some practical examples of how it works. Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries.

You record the financial transactions under separate account heads in your company’s general ledger, so at the end of the accounting period, you close these accounts. You do this as a result of balancing the debit and the credit sides of such accounts. A general ledger contains information related to different accounts, providing information that helps you in preparing your business’ financial statements, including income statements and balance sheets. A general ledger or accounting ledger is a record or document that contains account summaries for accounts used by a company.

Transactions are posted to individual sub-ledger accounts, as defined by the company’s chart of accounts. You need to compare the closing trial balances of previous accounting periods to the opening balances of the current period’s ledger accounts. In doing so, you’ll need to check the balance sheet accounts for details like assets, liabilities, and stockholder’s equity. To correctly record an increase or decrease to an account within your business, you’ll need to use either debit and credit for the double-entry bookkeeping method. This is a principal method of accounting in which transactions are recorded in at least two journal entries, debit to an account and corresponding credit aloe accounting to an account.

General Ledger vs. Balance Sheet

1. Assets are items of economic value that can be converted into cash or cash equivalents.
2. For example, a bookkeeper or accountant could use an accounting ledger, or general ledger, to identify the source of increased expenses and make the necessary corrections.
3. A trial balance is an internal report that lists each account name and balance documented within the general ledger.
4. Understanding what an accounting ledger is and its importance to your business finances can help you organize and track transactions more easily.
5. Transaction data is segregated, by type, into accounts for assets, liabilities, owners’ equity, revenues, and expenses.
6. Transactions are posted to individual sub-ledger accounts, as defined by the company’s chart of accounts.

First, the transactions are recorded in the original book of entry, known as the journal. Once the journal is complete, these transactions are then posted to individual accounts contained in general ledger. A general ledger summarizes all the transactions entered through the double-entry bookkeeping method. Under this method, each transaction affects at least two accounts; one account is debited, while another is credited. A subsidiary ledger (sub-ledger) is a sub-account related to a GL account that traces the transactions corresponding to a specific company, purchase, property, etc. A general ledger account (GL account) is a primary component of a general ledger.

The difference between journals and accounting ledgers

By this same analogy, a ledger could be considered a folder that contains all of the notebooks or accounts in the chart of accounts. For instance, the ledger folder could have a cash notebook, accounts receivable notebook, and notes receivable notebooks in it. In order to simplify the audit of accounting records or the analysis of records by internal stakeholders, subsidiary ledgers can be created. At the month end the difference between the total debits and credits on each account represents the balance on the account. We discuss the process of balancing the account in our post on balancing off accounts. Consider the following example where a company receives a $1,000 payment from a client for its services.

The name of the account ‘Electricity Expense’ and its account code 640 are also shown in the teaching ratios and unit rates in math heading. Expenses consist of money paid by the business in exchange for a product or service.

The general ledger is a foundational accounting document that contains a record of all your business’ activities. For each entry in your chart of accounts, it displays quickbooks set up new company a sub-ledger documenting the details of every transaction affecting it, culminating in the account’s running balance. The next step in the general ledger and financial reporting cycle is to prepare an unadjusted trial balance. A general journal records every business transaction in chronological order—it is the first point of entry into the company’s accounts.