What is a general ledger? A practical guide for founders

As a founder, you make financial decisions for your business every day, from buying software to hiring new team members. The better you understand what’s happening within your company’s finances, the more informed you’ll be when you need to make decisions like these.

You don’t need to be an accountant or bookkeeper to get useful insights from your financial records. But it’s useful to understand the basics, including what a general ledger is and how it works. As a central record of your company’s financial activity, it can help you see where your money is coming from, where it’s going, and how everyday transactions affect different accounts. Once you understand the concept of a general ledger, it’ll become easier for you to review your books, spot anything that deserves a closer look, and make more confident decisions about your business’s future.

In this article, we’ll break down the ins and outs of the general ledger, giving you the practical context you’ll need to make sense of your books.

A general ledger (GL), is the central accounting record that’s used to organize a company’s financial transactions into individual accounts. All transactions from the business — including sales, customer payments, payroll, bills, purchases, loans, and other financial activity — flow into the general ledger. In the days before accounting software, the general ledger was a literal ledger (a large notebook). Today, most companies use a digital version.

In a general ledger, transactions are grouped by account, not presented as a chronological list of everything a company does. When using double-entry accounting, businesses will record each transaction in a general ledger so that it affects at least two accounts through debits and credits. This helps keep the books balanced and provides a more complete picture of how each transaction affects your company’s finances.

The general ledger is one of the most important financial records in your business because it provides the data behind financial reports, like your balance sheet and income statement. But it’s more than just an accounting record: When you know how to read it, the general ledger can help you connect the dots between individual transactions and the bigger financial picture of your business.

What information does a general ledger contain?

A general ledger contains transaction-level details organized by account. Although the exact layout can vary based on your accounting system, here’s some information that’s typically included in a general ledger:

• Date: This will reflect when the transaction occurred or when it was recorded.
• Account: This is the GL account that was affected by the transaction.
• Description: This included information explaining the transaction.
• Reference: This could include an invoice number, transaction ID, journal entry number, or some other identifier.
• Debit: This is the amount recorded on the debit side of the account.
• Credit: This is the amount recorded on the credit side of the account.
• Balance: This will show the account balance after the transaction has taken place.

Some businesses also record additional details, like the customer, vendor, department, project, and other tracking categories.

What are the main accounts in a general ledger?

A general ledger contains several individual accounts, which together make up the company’s chart of accounts. These accounts are organized into five major account categories within the general ledger:

• Assets: Assets are the resources the business controls or owns, such as cash, accounts receivable, and equipment.
• Liabilities: Liabilities are any accounts that the business owes to others, such as accounts payable, loans payable, and accrued expenses.
• Equity: The owner’s interest in the business after liabilities are subtracted from assets. Examples include contributed capital and retained earnings.
• Revenue: This includes income earned through the business’s activities. (For a SaaS business, for example, this could include subscription revenue.)
• Expenses: Costs incurred to run the business — such as payroll, software, rent, advertising, and professional services — fall into this category.

So, what actually happens in a general ledger? When a financial transaction occurs, you, your bookkeeper, or your bookkeeping software will record it as a journal entry, then post it to the appropriate accounts in the general ledger. Each entry will identify which accounts are affected (and with double-entry accounting this will include at least two accounts), whether each account is debited or credited, and how much is recorded.

As transactions accumulate, they’ll affect the balance of each general ledger account. Modern accounting and bookkeeping software for startups can handle much of the journal entry and posting processes automatically, so you may not necessarily detect the mechanics of individual entries being created and posted to each account. Nevertheless, this accounting activity is happening behind the scenes.

The general ledger is where the detailed financial activity behind your financial statements gets recorded and organized. As transactions are posted to GL accounts, each account develops a balance. Those balances then flow into key financial statements, which give you a clearer picture of the business. These key statements include the:

• Balance sheet: This reports the balances of asset, liability, and equity accounts.
• Income statement: This reports the balances of revenue and expense accounts over a specific period.

Think of the general ledger as the detailed record behind the numbers on your financial statements. The statements give you the big picture, while the general ledger lets you drill down into the individual transactions that make up those numbers. If something looks unusual on a financial statement, you can review the relevant general ledger account to understand what’s driving the number.

When your bank account is connected to your accounting software, here’s how a transaction commonly enters your general ledger:

1. A transaction occurs in the bank account.
2. The accounting software syncs the transaction through the bank feed.
3. The transaction gets matched to an existing entry or categorized in the appropriate account.
4. The transaction affects the relevant general ledger accounts.
5. The resulting account balances feed into financial reports.

However, synced bank feeds aren’t the only way that transactions enter your books. Financial activity can also be recorded through invoices, bills, corporate cards, expense platforms, payroll systems, and manual journal entries.

No matter how transactions make their way into your books, reconciliation is an important step in keeping your records accurate and your books clean. The process involves comparing your accounting records with an outside record, like a bank statement, to make sure everything lines up and catch any missing, duplicated, or incorrectly recorded transactions.

If you’ve been typing phrases like “general ledger meaning” into your search engine to try to figure out what this term means and how it relates to your company’s bookkeeping processes, it can be helpful to see how everyday business transactions are recorded. Let’s walk through an example.

Example

An early-stage SaaS startup handles several transactions in a week. The company:

• Receive $5,000 in earned subscription revenue from customers
• Pay $500 for software that employees use
• Buy a $1,000 laptop with cash

Here’s how those transactions would appear in the general ledger. Note: this example is a simplified version and assumes that each account starts with a $0 balance.

Each transaction changes at least two accounts in the general ledger. For example, receiving payment for revenue you've earned increases your cash and revenue accounts, and buying a laptop increases your equipment account and decreases your cash account.

These account balances feed into your financial statements. Cash and equipment expenses will appear on your balance sheet, and revenue and software expenses will appear on your income statement.

If you’ve been googling things like “general ledger vs. trial balance,” “general ledger vs. journal,” or “chart of accounts vs. general ledger” to try to understand the differences between these terms, that’s totally understandable. The general ledger, chart of accounts, journal, and trial balance are all related, but each serves a different purpose in your accounting records:

• Chart of accounts: This is a list of all the accounts your business uses to organize its financial activity, such as cash, revenue, payroll expenses, and accounts payable. Think of it as the structure for your books.
• Journal: This is a chronological record of transactions as journal entries, showing which accounts are debited and credited before those entries are posted to the general ledger.
• General ledger: This is a detailed record of financial transactions organized by account. It shows the activity within each account and how that activity affects its balance.
• Trial balance: This is a report that summarizes the balances of all general ledger accounts, typically in debit and credit columns, to help verify that total debits equal total credits.

Put simply, the chart of accounts tells you which accounts exist, the journal records transactions as they happen, the general ledger organizes those transactions by account, and the trial balance summarizes the resulting account balances.

Using a general ledger can be overwhelming at first, especially if you’re new to the process of using one. Tread carefully, so you don’t make these mistakes.

Misclassifying transactions

When recording a transaction, be sure to use the right GL account. Otherwise, it can impact your financial reports. Using accounting automations with internal controls can help ensure that your transactions are correctly categorized.

Recording transactions twice

When you’re relying on a mix of bank feeds and software integrations, as well as manually entering data, this can sometimes result in duplicate transactions in your general ledger. And that can lead to overstated balances in your accounts.

Missing transactions

If you’re missing a transaction in the general ledger, the account balance will be incorrect and your financial statements will be incomplete. So, make sure to regularly clean up your books and make sure you’re not missing anything important.

Not reconciling your accounts

Compare your books with bank statements and other external records — and do this regularly. This will help ensure that you don’t have any incorrectly recorded transactions, duplicates, or missing information.

Ignoring unusual account balances

If a balance looks odd or unexpected, don’t gloss over it. Take some time to investigate why the numbers look the way they do.

AI bookkeeping tools can also help highlight issues for you. This could save you a headache when preparing your financial statements.

Knowing how your business’s financial transactions are organized and how account balances develop can give you valuable context as a founder. Understanding the general ledger can help you make sense of the numbers on your balance sheet and income statement. Plus, getting greater visibility into your company’s revenue, expenses, cash, liabilities, and other accounts will help you to make more informed decisions about spending, hiring, and growing your business.

Understanding your general ledger is one part of gaining greater control over your company’s finances. The tools you use can also make everyday money management simpler. That’s where Mercury comes in.

Mercury brings banking, cards, bill pay, invoicing, and more into one place, helping founders to simplify their financial workflows. Explore Mercury to see how you can manage your company’s money with greater clarity and control.