What is a general ledger?

A general ledger (GL), also known as an accounting ledger, is a core accounting tool that organizations and businesses use to maintain accurate and organized financial records, track their financial activities, and generate important financial statements for decision-making and reporting purposes. The GL serves as the central repository for all of the organization's financial data. 

Having a GL is essential to maintain proper, comprehensive financial records. It plays a crucial role in the accounting process and in safeguarding the integrity and transparency of financial data. It aids accountants in preparing reporting documents such as the organization's income statement and balance sheet.

The GL contains a detailed record of a company's accounting entries, which the organization categorizes into various accounts, such as assets, liabilities, equity, revenues, and expenses. 

The GL consists of several elements.

Chart of accounts

The general ledger starts with a chart of accounts, a list of all the different types of accounts a business uses to categorize its financial transactions. Each account has a unique account number and a name, and the organization sorts these accounts according to their nature (e.g., assets, liabilities, income, expenses).

Journal entries

Financial professionals record transactions in the general ledger through journal entries. A journal entry typically includes the date of the transaction, a description of the transaction, the accounts involved, and the corresponding debit and credit amounts. Debits and credits must always balance, maintaining the accounting equation: Assets = Liabilities + Equity.

Double-entry accounting

The general ledger follows the double-entry accounting system, meaning that every financial transaction consists of both a debit and a credit entry. Debits represent increases in certain accounts, while credits represent decreases or offsets to other accounts. This system helps maintain the balance in the ledger.

Posting entries

After recording journal entries, accountants record (or "post") the transactions into the specific accounts in the general ledger. Each account in the ledger shows its transaction history, including the date and amount of each entry.

Trial balance

Periodically, accountants prepare a trial balance from the general ledger to confirm that the total debits and credits in the ledger are equal. A trial balance is a financial report showing the closing balances of all GL accounts as of a particular date. When the total of the debit balances equals the total of the credit balances,  the books are in order and the accounting equation is being maintained.

Financial statements

The general ledger is the primary source for preparing financial statements, such as the balance sheet, income statement, and cash flow statement. These statements provide a summary of a company's financial performance and position.

Auditing and analysis

The general ledger is a valuable tool for auditors, accountants, and financial analysts to review and analyze a company's financial records. It provides a detailed history of all financial transactions, making it easier to assess the organization's overall financial health and performance.

Reconciling a GL is an essential financial process that confirms the accuracy and integrity of an organization's financial records. Reconciliation involves comparing and aligning GL entries with external sources of financial data like bank statements, invoices, and other subsidiary ledgers. The primary purpose of reconciling the GL is to identify and rectify discrepancies or errors. This ultimately guarantees that the company's financial statements truly and reliably represent its financial position.

The reconciliation process typically includes the following steps:

1. Bank reconciliation

Bank reconciliation is one of the most common GL reconciliations. It involves matching the GL transactions with those in the bank statement to detect differences. Unreconciled items may include outstanding checks, deposits in transit, bank fees, or interest.

2. Subsidiary ledgers

Companies often maintain subsidiary ledgers for specific accounts or departments, such as accounts receivable, accounts payable, or inventory. Reconciliation maintains these subsidiary ledgers' consistency with the GL, avoiding misstatements or omissions.

3. Journal entries

Those responsible examine the GL accounting entries to verify they accurately reflect the underlying transactions. This process can identify and correct errors in debits and credits, incorrect amounts, or missing entries.

4. Accruals and adjustments

Reconciliation may involve examining and adjusting accruals and other accounting entries to align them with the pertinent accounting principles and financial regulations.

5. Documentation review

Accountants can review supporting documentation, such as invoices, receipts, and contracts, to verify GL entry accuracy.

A GL code is a unique numeric or alphanumeric identifier that indicates a specific account in an organization's general ledger. The codes serve to categorize and differentiate the various accounts, making it easier to accurately record, organize, and reference financial transactions. These codes facilitate efficient accounting and financial reporting by providing a systematic way to track and manage financial information.