General Ledger Unveiled and Defined

December 27, 20235 min read
General Ledger Unveiled and Defined
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Key Takeaways

  • Commonly used in accounting, general ledger is a record of all a company’s past transactions
  • A company’s general ledger is the primary source for the business’s financial statements and trial balance. 
  • In addition to its use in accounting, the general ledger serves as a basis for a company’s financial statements.

A general ledger is essential in accounting, and on a larger scale, to a company’s financial standing. Investors should understand this record of company transactions to help them make investment decisions. To that end, here is the general ledger definition and its importance.  

What is a General Ledger (GL)? 

A general ledger is a record of all a company’s past transactions. As it is primarily organized by accounts, it is mainly used in accounting. 

Basically, a general ledger stores and organizes financial information used to produce the company’s financial statements.

What is the Importance of General Ledger in Accounting?

A company’s general ledger is the primary source for the business’s financial statements and trial balance. The latter contains the balances of the company’s general ledger accounts.

What is Double Entry Accounting?

Here, every financial transaction affects two or more sub-ledger accounts. Further, each general ledger entry has at least one credit and debit transaction. Called journal entries, double-entry transactions are posted in two columns. On the right are credit entries, and to the left are debt entries. Credit entries represent a rise in liabilities and the debits represent an increase in assets.

Once totaled, all credit and debit entries must balance.

What are the Components of a General Ledger?

A GL account is a general ledger’s chief component. It records each transaction for that account. Common general ledger account types, also known as sub-ledgers, include:

  • Asset. This is any resource a company controls or owns.
  • Liability. An obligation that forces the company to sacrifice future economic benefits to other companies or entities
  • Equity. After subtracting liabilities from total assets, equity is the remaining value of an owner’s interest in a business.
  • Operating revenue. A company’s income before deducting expenses.
  • Operating expense. Costs a company incurs for operational activities.
  • Non-operating revenue. The portion of a company’s income derived from activities unrelated to core business operations.
  • Non-operating expense and loss. A business expense unrelated to a company’s core business operations. This category commonly includes loss on the sale of assets.

What is the Function of the General Ledger?

A company’s general ledger exists for:

  • Financial transactions. The ledger records and processes a broad range of financial transactions.
  • Accounting purposes. A general ledger’s transactional information is organized into sub-ledgers. Once each account is closed out, the accountant prepares the trial balance.
  • Financial statement use. A general ledger serves as a basis for a company’s financial statements.
  • Audit and compliance. A ledger provides an organized record of all financial transactions, which is needed for audit and tax compliance.

How Are General Ledgers Maintained?

To have their general ledger prepared for the next accounting period, the accountant clears out expense and revenue accounts and shifts to owner’s equity the net income or loss.

What Does a General Ledger Tell You About a Company?

What is a general ledger? It is a report that can reveal a great deal about a company, including its overall financial wellbeing. It shows how much cash is coming in, the company’s expenses, and where improvements can be made.

As a company grows, it will also want to use a ledger to produce financial documents for potential investors.

What are the Pros of Investing in Venture Capital? 

Venture capitalists are investors who, to pool investment funds, commonly form limited partnerships. The capital is used to fund startup companies that seek to expand but lack access to equity markets.

Venture capital funds buy stakes in firms that venture capitalists target. Targeted firms are those that are bringing in revenue and seeking more funds to bring their ideas to life.

While every investment carries risk, venture capital offers exposure to startups with the potential for high growth — and high returns. Investors also gain a stake in disruptive and innovative companies and diversify their exposure beyond volatile public markets.

As general ledgers are used by companies to record each of their transactions, they serve as the foundation for varying types of financial reports. They offer details regarding finances such as assets, liabilities, cash flows, and purchases. Also listed are losses, gains, sales, and equity, all data an investor can use to make investment decisions.

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In Summary

General ledgers are integral to companies, as they contain all a company’s transactions. They are necessary for auditing and tax purposes. General ledgers also serve as a foundation for other types of financial reports of use to investors in investment decision making.

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