What is a General Ledger?

There are many ways to track financial transactions for your company. Many solopreneurs and small businesses start with a simple petty cash book system for recording profits and losses.

GLs are more common with bigger companies but can small businesses also benefit from them? This article will explore the different scenarios where switching to a GL might be worth it for you as a small business owner.

Here’s What We’ll Cover:

General Ledger (GL) – Definition

How Does a GL Account Work? 

General Ledger vs. T Account – Key Difference

How To Create a General Ledger

Should I Use a GL for my Small Business? 

Using General Ledgers in Your Business

More Accounting Resources for Businesses

General Ledger (GL) – Definition

“GL” is another name for general ledger or Principal Book of Accounting System.

A general ledger is an extensive record of a business’s credit and debit transactions over a period. These transactions are organized by accounts, together with their dates and descriptions—enough information to give you a bird’s-eye view of your business’s financial health.

How Does a GL Account Work? 

You’d enter balance sheet accounts like your assets, equities, and liabilities, followed by income statement accounts like revenues and expenses.

These data sets come from your journals which are the first points of entry for business financial transactions. Most small businesses keep four journals for recording sales, cash inflow and outflow, and purchases. However, as you scale, you might have up to 7 journals. 

When it’s time to balance the books for financial statements, you will organize all the information in your journal entries into the general ledger accounts. And use these details to create a trial balance. The trick is making sure the balances in your credit column, and debit column are equal; that’s how you know you’ve nailed it. 

General Ledger vs. T Account – Key Difference

A general ledger and T account are not the same. 

A GL is an aggregation of the different financial accounts of a business, including its assets, liabilities, and expenses. A T account is a graphic representation of the debits and credit from a double-entry accounting system. T accounts pick the debit and credit summaries from a GL and turn them into simple t-shaped visual structures that are easy to read. 

How to Create a General Ledger

The traditional method of creating a ledger is to draw up one on paper, which is time-consuming. With technology, small businesses have other options. You can either use a spreadsheet or opt for general ledger accounting software, allowing you to automate the entire process. 

Here is a step-by-step guide on how to create a GL: 

1. Create a table for your charts of accounts entries—assets, liabilities, revenues, equities, and expenses accounts.
2. Feed in information for individual accounts from your journal entry. Depending on the size of your company, you can use a subsidiary ledger, which is accounts receivable and accounts payable.
3. Include the GL code of each journal entry in the ledger’s number column. A general ledger code helps you to track each transaction and organize your accounts appropriately. 
4. Debit and credit the accounts and record their running balances. 

Should I Use a GL for My Small Business? 

If you can fit all your financial records into a single entry account, why do you need a general ledger? This is the million-dollar question for small businesses. 

Use a single entry account if;  

1. You’re a small business with less than five million dollars in gross sales.
2. You cannot afford an accountant or bookkeeping services.
3. You’re a new business keen on tracking your profits and losses closely. 
4. You run a service-based business.  

Suppose any of these apply to you, then Voila! There’s little or no need to switch to a general ledger. However, once you step out of these categories, consider double-entry bookkeeping. 

A GL comes in handy when you want to; 

1. Secure a small business loan from the government or private lenders; 
2. Sort out business transactions and balance your books effectively and; 
3. Prepare for an audit of accounting records. 
4. Create various business financial statements like a balance sheet, income statement, and a statement of cash flows. 

Using General Ledgers in Your Business

A general ledger (GL) is one of the essential tools for making intelligent business decisions. It provides an easy way for business owners to keep tabs on their business performance, manage cash flows, and improve their financial health.

More Accounting Resources for Businesses

• What is Unlevered Free Cash Flow?
• What is Overtime Pay?
• How Accounting Payroll Systems Work

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