For many people, the idea of a general ledger might conjure up images of visor-wearing accountants wielding quill-and-ink pens, scribbling numbers and notes in large, dusty parchment books. While many fundamentals of the general ledger remain intact more than 500 years after it was established as a cornerstone of modern accounting, technology has moved it light-years into the future.
In this blog, we’ll take a look at the definition of a general ledger, give a brief overview of its history and components, and explain how it has evolved over the years to remain a powerful financial tool essential for business.
What Is a General Ledger?
A general ledger is the system of record for an organization’s financial transactions, whether it’s maintained on paper, on a computer, or in the cloud. It uses numbered accounts, including debits and credits, from which a trial balance is computed. It holds all the data needed to prepare periodic financial statements—such as balance sheets, income statements, cash-flow statements, and other financial reports—on a monthly, quarterly, or annual basis.
Transaction data in a general ledger is organized by type: assets, liabilities, owner’s equity, revenues, and expenses. A general ledger, sometimes abbreviated as GL, is also known as a general journal.
For a large company, the general ledger could contain thousands of accounts, known as the chart of accounts, representing balances resulting from journals, subledgers, and external system transaction data.
How Does a General Ledger Use Subledgers?
A subledger contains a specific subset of financial transactions, such as accounts receivable, accounts payable, or fixed assets. Subledgers generally contain information about one type of transaction.
Transactions in a subledger are periodically recorded in the general ledger. Depending on how they are structured by an organization, subledger transactions are generally recorded on a daily, weekly, or monthly basis.
In the event of an audit, balances on financial statements should link back to all of the posted transactions that make up that balance.
How Was the General Ledger Developed?
The earliest known accounting records date back more than 7,000 years to Mesopotamia, where traders developed a way to track the exchange of goods and services. Since then, various societies around the world developed systems of financial record-keeping. But it wasn’t until an Italian mathematician by the name of Luca Pacioli published the concept of double-entry bookkeeping in his influential 1494 publication “Summa de arithmetica, geometria, proportioni et proportionalita,” or “Summary of Arithmetic, Geometry, Proportions, and Proportionality.”
Sometimes known as the father of accounting, Pacioli, who was a Franciscan friar and contemporary of Leonardo da Vinci, didn’t invent double-entry bookkeeping as much as described “bookkeeping alla Veneziana,” the Venetian style of accounting that had been used as early as the 1300s and itself might have been influenced by methods used earlier throughout the Islamic world and India.
Why Use a General Ledger?
A general ledger is used to record every financial transaction made by an organization and serves as the basis for various types of financial reports. It provides details about finances such as cash flows, assets, liabilities, inventory, purchases, sales, gains, losses, and equity.
The general ledger also contains information used to calculate the financial performance of an organization. Understanding an organization’s finances is essential for creating budgets and business strategies, as well as for assessing the financial health of a business.
Does a General Ledger Use Double-Entry Bookkeeping?
Yes. Double-entry bookkeeping is the accounting method by which every financial transaction affects at least two accounts: a debit and credit account.
For instance, the purchase of a $2,000 computer would increase the business’s assets by $2,000 while decreasing its cash position by the same amount.
Incidentally, Pacioli popularized the vernacular Venetian terms “debere” (to owe) and “credere” (to entrust), from which debit and credit accounts get their names.
The accounting equation, sometimes called the balance-sheet equation, is the foundation of double-entry bookkeeping and is written as: “assets = liabilities + equity.”
What Are the Components of a General Ledger?
A general ledger can have any number of subledgers, sometimes also known as journals. Some of the most common types of subledgers include accounts payable, accounts receivable, cash, assets, expenses, and income.
The general ledger acts as a central depository for accounting information collected from subledgers, for example, stock, cash on hand, accounts receivable, customer deposits, accounts payable, etc.
The chart of accounts within a general ledger is usually divided into at least seven main categories: assets, liabilities, owner’s equity, revenue, expenses, gains, and losses. The chart of accounts acts as a directory for all types of transactions an organization has. Each category of accounts corresponds to different financial statements, for example:
Balance sheet (assets, liabilities, and equity).
Income statement (revenues, expenses, gains, and losses).
Are There Drawbacks to Using a General Ledger?
The general ledger serves a straightforward function: to record financial transactions throughout the lifespan of an organization. The general ledger can then be used to produce periodic financial statements. For those purposes, the general ledger accomplishes what it’s supposed to.
However, the general ledger also contains information about an organization’s past financial transactions and is used to produce financial statements that are backward-looking over a specific period, sometimes for year-over-year comparisons. That means the financial information, as well as the more detailed journal entries that feed into it, provide a picture of the past.
With its focus on past transactions, the information in a general ledger often reflects a point in time (month-end, quarter-end, or year-end). The timing of when information is posted to the general ledger and when the information is reported represents what “has” already happened and limits insight into what’s happening now or what might happen.
For these reasons, this limitation of a general ledger could hinder an organization’s agility or its ability to course correct or proactively take advantage of an opportunity before the month- or quarter-end. As businesses attempt to keep pace with the speed of change, the general ledger is of limited use when providing forward-looking insight and business strategies.
Also, as the purview of the finance function grows in complexity—to include seemingly disparate elements such as environmental, social, and governance (ESG), sustainability, talent and retention, , enterprise resource planning (ERP), and value creation—the general ledger of yesteryear might not be adequate to track data and metrics that will be important in the future.
What Does the Future of the General Ledger Look Like?
What worked well in the past might not serve the business needs of the future. Many organizations operating in an increasingly complex world and a sometimes uncertain economic climate—along with those conducting business internationally—require a much higher degree of sophistication than a traditional general ledger can provide.
When accounting systems first moved into the world of technology, elements such as accounts payable, accounts receivable, and assets were siloed systems, says Annette Melatti, Workday’s vice president, solution marketing for the office of the CFO. Early technology solutions incorporated those systems into integrated accounting suites. Yet finance professionals soon realized that they also needed analytic and planning solutions, as well as project management functionality and greater controls to comply with expanding regulatory record-keeping requirements.
With legacy accounting systems, the chart of account segments are configured at the time of deployment and fixed for the duration of their lifespans. Depending on the business’s needs, it typically creates chart of account segments for account, cost center, or department—or possibly even a product or project. “In the long term, they lack the flexibility to grow as the business grows, whether a result of mergers and acquisitions, international expansion, creation of new subsidiaries, or any other change that requires the business to look at its financial data from a different perspective,” Melatti adds.
“By contrast, Workday uses an object data model, which allows finance to organize data more efficiently and associate much greater detail to each transaction. Instead of creating fixed segments for each part of its accounting key, finance selects the objects needed to represent its transactions and business,” Melatti says. For example, account, department, project, and product are available, but finance also has access to customer, supplier, employee, campaign, region, location, etc., which would never be added as segments in the chart of accounts of a traditional general ledger. Accounting professionals are then able to tag any given transaction with the appropriate objects. “This approach creates a powerful way to get more granular information about financial transactions, giving finance leaders greater visibility into profitability and performance of the business itself,” Melatti adds.
Combining machine learning enabled financial processes and real-time recording of transactions, traditional accounting functions such as closing the books can occur in a fraction of the time it used to. Workday itself is approaching a zero-day close.
As the finance function continues to evolve in a rapidly changing world, technology has enabled businesses to expect more from their data and far beyond what the general ledger can provide.
