The general ledger plays a critical role in the accounting cycle. A general ledger contains a record of every transaction your business has ever encountered. A general ledger is also known as a nominal ledger.
The general ledger originates from other journals or sub ledgers. For example, information recorded or posted in your general ledger may originate from or be posted in your sales or cash receipts journal.
Most companies use the double entry system when posting transactions to the general ledger. Meaning for every transaction, a debit is posted on the left, and a credit is posted on the right. Typically, each debit or credit affects two or more general ledger accounts.
Setting Up a Ledger
The general ledger is set up as a series of T accounts. Cash, accounts receivable, and sales are examples of accounts you'll use in your general ledger. Setting up your ledger involves no analysis on your part. Simply transfer financial data from the journal to the general ledger. Make sure the balances match.
After all information in the general ledger has been verified for accuracy, the balance sheet and income statement can be created. Your general ledger may be manual or electronic. Most companies have software that allows a user to input financial information into the computerized general ledger.
Your general ledger can help detect and prevent fraud in your business. A general ledger allows you to establish checks and balances within your business. For example, if you have cash on hand of $40,000, that should be the same number posted in the general ledger. Your general ledger may come in handy should your business get audited by the IRS.