What it means
Accounting systems record transactions in journals or subledgers first: a sales ledger holds every customer invoice and receipt, a purchase ledger every supplier invoice and payment, a payroll system every wage calculation, a cash book every bank movement. These detailed records are then posted, in total or individually, to the general ledger, which holds one account for each type of asset, liability, equity, revenue and expense as defined in the chart of accounts.
The subledgers answer "who owes us what"; the general ledger answers "how much are we owed in total, and what is the balance of every account in the business". The ledger is where double entry lives.
Every posting has a debit and a credit, and the ledger as a whole always balances. Control accounts link it to the subledgers: the accounts receivable control account in the general ledger must equal the sum of all customer balances in the sales ledger, and reconciling the two each month is a core control.
Similar reconciliations tie the bank account in the ledger to the bank statement, and the fixed asset account to the fixed asset register. The general ledger also carries the period structure.
Transactions are posted to accounting periods, periods are closed once reviewed, and closed periods are locked so that historical figures cannot change without a deliberate reopening. Closing entries transfer the year's revenue and expenses to retained earnings.
Adjusting entries for accruals, prepayments and depreciation are posted directly to the ledger as journal entries, which is why the journal entry review is one of the most important controls in any finance function: it is the one route into the ledger that bypasses a subledger and its checks. In modern systems the general ledger is a database rather than a book, and it may carry dimensions such as department, project and location alongside the account code, so that a single expense account can be analysed many ways.
But its function is unchanged since it was kept in bound volumes: it is the place where every transaction is finally recorded and from which every report is drawn.
In practice
Real-world examples.
Example
A retailer's point-of-sale system posts daily sales totals to the general ledger revenue and cash accounts, while the detail of every transaction stays in the sales system.
Example
A company's month-end close checklist requires the general ledger bank account, receivables control, payables control and fixed asset account to be reconciled to their sources before the period is locked.
Example
An auditor extracts every manual journal entry posted to the general ledger in the year and tests the large, round-numbered and period-end ones for authorisation and support.
Think of it
“The general ledger is like a master file that keeps track of everything-every dollar that came in, went out, or moved between accounts.
Formula
Calculation
For every account: Closing Balance = Opening Balance + Debits posted minus Credits posted (for debit-balance accounts), or Opening Balance + Credits minus Debits (for credit-balance accounts)
Ledger integrity: Sum of all debit balances = Sum of all credit balances
Control account check: General Ledger Receivables Control = Sum of Sales Ledger customer balances
Worked example. A distributor's accounts receivable control account for March:
- Opening balance 1 March: $410,000 debit
- Sales invoices posted from the sales ledger during March: $620,000 (debits)
- Customer receipts posted from the cash book: $585,000 (credits)
- Credit notes issued: $15,000 (credits)
- Bad debt written off by journal entry: $8,000 (credit)
- Closing balance 31 March = $410,000 + $620,000 minus $585,000 minus $15,000 minus $8,000 = $422,000 debit
The sales ledger's list of individual customer balances at 31 March totals $424,500. The $2,500 difference must be found: it turns out to be a receipt posted to the general ledger via the cash book but not yet allocated to a customer in the sales ledger. Once allocated, both agree at $422,000. Without the reconciliation the discrepancy would have persisted and grown.
Trial balance check at the same date: the ledger holds 84 accounts. Debit balances (assets and expenses) total $3,960,000; credit balances (liabilities, equity and revenue) total $3,960,000. The ledger balances and the financial statements can be prepared.Case study
Seen in the real world.
A wholesale business ran its general ledger in one system and its sales ledger in another, and nobody reconciled them. The general ledger showed receivables of $2.3 million; the sales ledger showed $1.9 million. The finance manager assumed the difference was timing.
When the auditors insisted on a reconciliation, the $400,000 gap dissolved into three parts: $150,000 of receipts posted to the ledger but never allocated to customers, so those customers had been chased for money they had paid; $130,000 of invoices raised in the sales system that had failed to transfer to the ledger, so revenue was understated; and $120,000 of journal entries a former controller had posted to receivables to balance unexplained bank differences, which turned out to be his own misappropriations disguised as customer adjustments. The company integrated the two systems, made the control account reconciliation a signed monthly deliverable, and required a second approver for every manual journal above $5,000.
Watch out
Common mistakes.
- Posting corrections by manual journal without understanding the cause, which hides errors and creates a route for fraud.
- Leaving control accounts unreconciled. Unexplained differences between the ledger and subledgers are where most accounting problems surface.
- Allowing closed periods to be reopened casually, which changes figures that have already been reported.
Questions
People also ask.
What is the difference between the general ledger and a subledger?
A subledger holds the detail for one area, such as individual customers or suppliers. The general ledger holds the summary account for every area and is the basis of the financial statements.
What is a general ledger account?
One record in the ledger for one type of balance, such as cash, inventory, sales revenue or rent expense, defined by the chart of accounts.
How often should the general ledger be reviewed?
Control accounts and bank should be reconciled monthly; every account balance should be reviewed at least quarterly and fully at year end.
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