General Ledger
The master record of all financial transactions in a business.
Definition
The general ledger (GL) is the central repository of all accounting transactions. Every financial event—sales, purchases, payments, receipts—is recorded in the general ledger with date, amount, description, and account classification. It's organized by accounts: assets, liabilities, equity, revenue, and expenses.
Modern accounting systems maintain the general ledger automatically as transactions are entered. The GL is the source of truth for financial statements: the balance sheet, income statement, and cash flow statement are all derived from general ledger data.
Why It Matters
The general ledger is the backbone of financial record-keeping and reporting. Accurate GL records are essential for tax compliance, financial analysis, audit trails, and informed decision-making. Errors in the GL flow through to all financial statements.
For invoicing, each invoice generates GL entries: accounts receivable (debit) and revenue (credit). Payments generate entries: cash (debit) and accounts receivable (credit). Understanding this flow helps interpret financial reports.
Examples
- 1
An invoice for $5,000 creates GL entries: debit Accounts Receivable $5,000, credit Revenue $5,000.
- 2
When the invoice is paid, new entries: debit Cash $5,000, credit Accounts Receivable $5,000.
- 3
Month-end closing verifies all GL entries are properly recorded and classified before generating financial statements.
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