In accounting there are several financial documents used to track a company’s transactions and overall financial health. The general ledger and the balance sheet are two of the central documents in a company’s accounting process. Although they include similar information, the general ledger and the balance sheet are not the same. Their purpose is separate and the methods of recording information in each are different.
All transactions are posted to the general ledger from the daily journal using a system of debits and credits, much like you use in a check book. It is the core of your company’s financial records, tracking every transaction from the first day of your company’s history. A balance sheet is not recorded in as much detail as a general ledger. It is a snapshot of a company’s financial health in terms of assets and liabilities at a certain point in time.
Accounts in a general ledger are grouped in five categories; assets, liabilities, equity, revenue and expenses. There is typically a separate page for each account tracked by the general ledger. Transactions are recorded in a general ledger as they occur for each account. For example, a payment made to a creditor would be recorded under “expenses," and on the same day if a customer made a payment to the company, it would be recorded under “revenue." A balance sheet is not divided into separate pages. Instead, the totals for each category are recorded as they stand for that period. For example, revenue totals as of Dec. 31 would be recorded and expenses would also be totaled and recorded. So payments to creditor A, B and C would be totaled, rather than recorded individually.
The general ledger is used as a data source for other financial documents, including the balance sheet. The general ledger tracks transactions and keeps a record of all data for the company so that other financial documents can be accurately compiled. Inconsistencies, accounting errors and losses can be tracked through the general ledger. The balance sheet shows whoever is looking at it (like a creditor, for example) what a company owns as well as what it owes to other parties as of the date it is completed. Balance sheets are often used to determine if a business qualifies for credit or a loan. Creditors, investors (potential and current), management, suppliers, customers, government agencies and labor unions use the balance sheet to forecast where the company will be, or how it will look financially down the road. For a creditor, this is a tool to estimate the company’s “risk” when considering a loan. For the company’s CEO or president, the balance sheet helps to determine if the company has too much inventory or if it needs to increase revenue.