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What Is a General Ledger (GL)?

Chime Team • July 10, 2024

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General Ledger (GL)

A general ledger is like a detailed map showing every financial step your business takes, from the money you make to the money you spend. It keeps track of every financial transaction and provides a comprehensive snapshot that can help you understand the financial health of your business at any given time.

General ledgers are typically organized into different accounts, including:

  • Revenue: The total amount of income earned by the company by selling a product or service.
  • Expenses: The costs associated with running your business. This can include payroll, rent, insurance, and advertising costs.
  • Assets: Includes everything from office furniture and laptops to real estate and patents. Assets are basically anything of value that’s owned by the business.
  • Liabilities: Includes any debts the business owes. Taxes owed to the government or pension payments owed to employees are examples of liabilities.
  • Equity: The total value of the business after deducting liabilities.

Every business transaction is recorded in these accounts, providing a clear, organized view of where money is coming from and going.

This meticulous record-keeping is crucial for creating financial statements like balance sheets and income statements. These are like report cards for your business, showing how well it’s doing financially.

Here’s an example of how a general ledger works. Let’s say you run a small bakery. Every time you sell a cake, the sale amount is recorded in the sales account of your general ledger. Similarly, when you buy flour, that expense is noted in the supplies account. This way, every bit of money earned and spent is accounted for in the ledger. It’s essentially a diary of your business’s financial life, ensuring no transaction is lost.

For example, if your bakery had a particularly good month, you’d see more entries in the sales account, indicating higher revenue. Conversely, if you decided to renovate the shop, you’d see a significant expense entry in the ledger. These records help you understand how specific events or decisions impact your business financially.

In a way, a general ledger is similar to tracking your personal income and expenses in a detailed budget. Just as businesses need to understand their financial standing to make informed decisions, people can use the principles of a general ledger to keep track of their financial health. By monitoring your income sources, daily expenses, savings, and investments, you create a personal ledger to help you manage your finances more effectively, identify spending habits, and set financial goals.

You can apply this concept in your daily life by using budgeting apps or personal finance software, which is like having your own general ledger. These tools categorize your income and expenses and provide insights into your financial health, helping you make smarter financial decisions.

Understanding the idea of a general ledger offers valuable insights into the broader context of financial literacy and management. It highlights the importance of organized financial record-keeping for both businesses and individuals.

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