Understanding a Small Business’s General Ledger

Whether you’ve been a small business owner for some time or you’re just getting started, “keeping the books” is probably a phrase you often hear. But what exactly does that mean and how do you do it? That’s where a general ledger comes in handy. After all, it’s the main record of your business’s financial standing. Keep reading as we outline the general ledger definition, how it works, and why it’s important for your small business. We’ll end by answering, “How to make a ledger for my business.”

What is a general ledger (GL)?

Next, let’s discuss the ledger definition so you can use the general ledger meaning to apply to your own business. A general ledger (GL), sometimes called an accounting general ledger or accounting ledger, is a set of numbered accounts. A business uses these accounts to keep track of its financial transactions and prepare financial reports like balance sheets and income statements.

Each account is a unique record that summarizes a specific type of asset, liability, equity, revenue, or expense. Essentially, it’s a complete record of every one of your business’s financial transactions over time. A small business’s GL is probably simpler than a large business’s. A larger corporation can have thousands of accounts.

Why businesses use general ledgers

Certified public accountants (CPAs) or bookkeeping professionals commonly access and work with a company’s general ledger. An accounting ledger gives a detailed view of every transaction for the month, quarter, or year. So, with help from a bookkeeper, your small business could use a general ledger to:

• Monitor finances
• Track transactions and monitor cash flow
• Compile a trial balance to ensure your books properly balance
• Make small business tax filing easier by compiling expenses and income in one organized place
• Help catch accounting errors and prevent fraud
• Prepare other financial statements
• Make financially-based decisions

How a general ledger accounting works

As you can see, a general ledger is very important for businesses to understand. But how does one work? A general ledger uses double-entry accounting for generating financial statements. Double-entry accounting involves entering your financial transactions using two categories, debit and credit.

• Debit: An entry that increases asset or expense accounts, or decreases liability, equity, or revenue accounts. Think of it as “adding” to things you own (like cash or equipment) or “spending” (like rent or salaries). In accounting, debits are typically recorded on the left side of a ledger.
• Credit: An entry that increases liability, equity, or revenue accounts, or decreases asset or expense accounts. Imagine it as “borrowing” or “owing” money, or “earning” revenue. Credits are generally recorded on the right side of a ledger.

You’ll notice that debits and credits should balence each other out. This is what is meant by keeping accounting equation “balanced” or “balancing your books.” If your general ledger is not balanced, there may be a mistake. The Double-entry method requires that every transaction has at least one debit (incoming money) and one credit (outgoing money) entry. The double-entry accounting formula can be leveraged to determine an Owner’s equity. That is, Owner’s equity = assets – liabilities.

What’s included in a general ledger?

Again, the purpose of a general ledger is to show a record of a company’s financial transaction history. The information included in a general ledger includes:

• A journal entry number and date
• A description of the specific transaction
• A debit column
• A credit column
• Account balance

A general ledger also includes a chart of accounts. These have the account names and numbers for categories like:

• Assets (cash, accounts receivable, inventory, fixed assets)
• Liabilities (accounts payable, accrued expenses)
• Equity (owner’s or member’s capital, dividends, retained earnings)
• Operating revenues (sales, service fees) and expenses (wages, rent, utilities)
• Other income and expenses

How to create an accounting ledger

Creating and formatting a simple general ledger is fairly straightforward. THere are four basic steps to creating your accounting ledger:

1. Set up your ledger accounts – Make a list of accounts and assign a number to each. Don’t forget to include all of your assets, liabilities, equity, revenue, and expenses.
2. Create columns – Creating columns helps with sticking to the style of the double-entry accounting method. You need several columns in your ledger. First create one column to list debits and one for credits. Then add additional columns for the transaction date, description, ledger number, and amount.
3. Record your transactions – Fill out the ledger as credits and debits take place. Remember, each time money enters or leaves your company, it should create a ledger transaction.
4. Create a trial balance – The trial balance is the record of all debits and credits in your general ledger. If everything has been done correctly, the balance of the debit and credit columns should be equal, and your books will be balanced.

General ledger example

Here’s an example of how a general ledger could look for a small business. Note that this version is handwritten. However, general ledgers can also be built on computer software digitally. Whichever way you go, the important thing is that at the end of the day all transactions are logged properly, and your books balance.

This means the total of your debit and credit columns is the same. Put diferently, if you subtract debits from credits, the resulting value should always be zero if you balance your books correctly.

General journal vs general ledger

A lot of the information in an account journal looks the same as a general ledger, so it’s easy to get them confused. There are some key differences between these two accounting terms, though.

You can think of an accounting journal as the first record of a transaction. Details should be entered in chronological order with as much detail as needed to ensure they are transferred correctly to the ledger.

The ledger is basically a collection of your journal entries. But, it’s important to note that the general ledger is where the double-entry accounting happens. The most common types of journals are sales journals, purchasing journals, cash receipts journals, and cash payments journals.

Other types of business ledgers

As well as a general ledger, there are other types of ledgers your small business may use for bookkeeping purposes.

• Purchase ledger: A purchase ledger helps your business keep track of items it buys. If your business doesn’t purchase enough items to necessitate a separate ledger, these entries can be part of the general ledger. Your purchase ledger will generally have the date of purchase, supplier’s name, an invoice or purchase number, the amount you paid, and any tax paid.
• Sales ledger: A sales ledger, on the other hand, is a list of all the sales your business has made. The ledger is helpful in keeping track of anything that reduces the number of total sales (returns or outstanding amounts). This ledger will generally have the date of sale, customer’s name, the invoice number, how many items were sold, the tax charged, and any shipping costs.

Get help streamlining your small business accounting

Handling your books on your own can be overwhelming, especially if you’re new to general ledgers and bookkeeping best practices. Luckily, our Block Advisors small business bookkeeping service can help. Get direct support from account managers who can help streamline day-to-day bookkeeping paperwork, so you can focus on your business.

Get back to doing what you love and let our experts lighten your load, in person or virtually, year-round—as always—backed up by the Block Advisors guarantees. Our taxes, bookkeeping, payroll, and incorporation services are designed with small business owners like you in mind.

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General Ledger Frequently Asked Questions

Q: What is a general ledger in simple terms?
A: A general ledger is a numbered set of accounts that records every financial transaction your business makes, including assets, liabilities, equity, revenue, and expenses. It serves as the main bookkeeping record used to prepare financial statements and monitor your business’s financial health.

Q: Why do small businesses need a general ledger?
A: Small businesses use general ledgers to track transactions, monitor cash flow, catch accounting errors, prevent fraud, simplify tax preparation, and make informed financial decisions. It provides a detailed view of all business transactions for any given period.

Q: What’s the difference between a general ledger and a general journal?
A: A general journal is a chronological record where transactions are initially entered with full details. The general ledger is a collection of these journal entries, organized by account type, where double-entry accounting (debits and credits) is applied to keep books balanced.

Q: How do I create a general ledger for my small business?
A: To create a general ledger, follow four steps: (1) set up numbered accounts for all asset, liability, equity, revenue, and expense categories; (2) create columns for transaction dates, descriptions, debits, and credits; (3) record each financial transaction as it occurs; and (4) create a trial balance to ensure debits equal credits.

Q: What is double-entry accounting in a general ledger?
A: Double-entry accounting requires every transaction to have at least one debit entry (increases assets/expenses or decreases liabilities/revenue) and one credit entry (increases liabilities/revenue or decreases assets/expenses). This system keeps your accounting equation balanced and helps catch errors.

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This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.