The general ledger, explained one account at a time.

If the journal is the diary of your business, the general ledger is the filing cabinet. With the general ledger explained properly, a lot of bookkeeping clicks into place: it's where every debit and credit ends up, organized so you can see the full story of any one account.

This post follows journal entry examples on our Bookkeeping Basics learning path. Once you understand the ledger, the next step is the trial balance, which is simply a list of every ledger balance.

1What a general ledger is

The general ledger (GL) is the complete record of your business's transactions, organized by account. Every account in your chart of accounts gets its own section, and each section lists:

• The opening balance at the start of the period
• Every transaction that touched the account: date, description, reference, debit or credit
• A running balance after each transaction
• The closing balance at the end of the period

Those closing balances become your financial statements. Asset, liability and equity balances make the balance sheet. Revenue and expense balances make the profit and loss.

2Journal vs ledger

The journal and the ledger contain exactly the same information, arranged differently.

Moving each line from the journal into its account is called posting. On paper it was a tedious step. In QuickBooks Online and Xero it happens the instant you save a transaction.

3The general ledger explained with a worked month

Say you run a small yoga studio in Sherwood Park, registered for GST. Your business chequing account starts June with $4,000. Here's June:

• June 1: pay studio rent of $2,000 plus $100 GST.
• June 5: deposit $3,150 from class pack sales ($3,000 plus $150 GST).
• June 15: pay a contract instructor $1,200. She isn't registered for GST, so there's none on her invoice.
• June 28: card processor deposit of $2,100 ($2,000 of drop-in sales plus $100 GST).
• June 30: monthly bank fee of $25. Bank service charges are generally GST-exempt.

Step 1: the journal entry for the rent

Each transaction is first recorded as a journal entry. Here's June 1:

That one entry posts to three ledger accounts: rent expense, GST/HST Payable and chequing.

Step 2: the chequing account in the ledger

The closing balance of $5,925 should match your bank statement for June 30, give or take any items that haven't cleared. Proving that is what a bank reconciliation does.

Step 3: the GST/HST Payable account in the ledger

Assuming it started June at zero, the account ends with a $150 credit balance: you collected $250 of GST and paid $100, so you owe CRA $150 for June. The ledger shows exactly how you got there, line by line.

T-accounts: the ledger on a napkin

Accountants often sketch a ledger account as a big letter T: the account name on top, debits down the left, credits down the right. It's the fastest way to think through a tricky account by hand. Here's June's revenue as a T-account, combining both revenue lines:

Revenue normally sits on the credit side, so a $5,000 credit balance is exactly what you'd expect. If a debit ever showed up here, it would be a refund, a correction or a mistake, and worth a look.

What happens to the ledger at year-end

Balance sheet accounts like the bank, GST/HST Payable and loans carry their balances forward into the new year. Revenue and expense accounts don't: they start every year at zero, and the year's net result moves into equity. This is called closing the books.

Say the studio finishes the year with $60,000 of revenue and $41,000 of expenses. The closing entry, in summary, looks like this:

QuickBooks Online does this for you behind the scenes: on the first day of your new fiscal year, last year's profit simply appears in retained earnings on the balance sheet, and your profit and loss starts fresh. You never need to post the closing entry yourself, but knowing it happens explains why retained earnings changes on January 1.

4Subsidiary ledgers

Some ledger accounts have more detail behind them, kept in a subsidiary ledger:

• Accounts receivable: the GL shows one total. The subsidiary ledger (your customer list and aging report) shows what each customer owes.
• Accounts payable: the same idea for suppliers.
• Fixed assets: a list of each asset, its cost and its CCA class, behind the equipment and vehicle accounts.

The subsidiary total should always equal the GL balance. When an aged receivables report doesn't match accounts receivable on the balance sheet, something was posted directly to the account without a customer attached.

5The general ledger in QuickBooks Online

• Full report: open Reports and search for General Ledger. Set the date range and, if you want, filter to specific accounts.
• One account at a time: from the chart of accounts, use the option to run a report on an account. It's the quickest way to review a single ledger account.
• Drill down: click any amount on the profit and loss or balance sheet to see the ledger lines behind it, then click a line to open the original transaction.
• Exports: your accountant will often ask for the general ledger for the year, exported to Excel, alongside the trial balance.

The ledger is also the fastest way to answer everyday questions about your business. How much did you spend on fuel last quarter? Run the ledger for the fuel account and that date range. Did a client's payment actually land? Check the bank account's ledger around the date. Why is GST owing higher than expected? Open GST/HST Payable and read the lines. Once you get used to it, you'll reach for the ledger before any summary report.

6Common general ledger mistakes, and how to spot them

Use the ledger as a review tool. Scan each account for things that don't belong:

• Wrong-side balances. An expense account with a credit balance, or a bank account with a credit balance when you're not overdrawn.
• Duplicates. The same amount on the same date twice, often from a bank feed plus a manual entry.
• Odd entries in revenue. Owner deposits, loan proceeds or transfers between your own accounts coded as sales.
• Balances that never clear. A suspense or "Uncategorized" account with a growing balance, or old receivables nobody follows up.
• Lumps in the wrong year. A large December expense that's really a prepayment for next year.

CRA expects your records to be complete and supported by source documents, and kept for at least six years. Our post on how long to keep business records covers the details.

A clean general ledger is what we hand our partner CPA at year-end for clients across Edmonton, Sherwood Park, St. Albert and Leduc. If yours needs a review or a full tidy-up, book a short call and we'll take a look.

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This article is general information for Alberta businesses and isn't tax or legal advice. Rules and thresholds change, so confirm your situation with your accountant or CRA.