Any organization with an inflow and outflow of funds (debits and credits)—income, donations, depreciation, or expenses—needs to record and track these transactions. The goal is to prepare the company’s financial statements and hence, gain insight into the financial status. 

A general ledger, more commonly known as a GL, is a recordkeeping system that tracks this financial data, a process that can be significantly streamlined with the use of the right accounting software. 

GL accounts and why companies need them   

Some common examples of these accounts are listed below:

• Assets: cash, checking or savings accounts, property and any structure attached to it, inventory, patents, accounts receivable
• Liabilities: payable employee salaries or wages, loans or debt, certain taxes, accounts payable
• Subsidiaries: an independent company that is more than 50% owned by another company, usually referred to as its parent company
• Expenses: cost of goods sold (COGS), sales commissions, advertising, depreciation, supplies, utilities
• Revenue: sales, interest income, dividend income, rental income, contributions, or donations
• Equity: most commonly referred to as shareholders equity, this is the value of a company if all of its assets were liquidated and debts were paid off (in simpler terms, equity equals assets minus liabilities)

During a given time period, accountants and other finance staff record debits and credits of bills paid and payments received. This is performed to verify that all transactions for the period are recorded in the correct accounts and correct amounts are noted. They also have to draw a firm line between one period and the next so there’s a definite cutoff for each period’s activities. It is quite common for most organizations to balance the books monthly, quarterly, and yearly.

Each transaction logged in a GL is called a journal entry and is posted to ledger accounts based on the company’s chart of accounts. A chart of accounts is a breakdown of account types by numeric range or a type of filing system to categorize transactions according to the accounts they affect. When finalized, a GL should be an agreed-upon single source of truth for a company’s financial standing, which in turn is used to create financial statements, perform financial analysis, and conduct audits. 

What makes a GL a must-have for companies?

A GL tells a story of the financial wellbeing of a business. For example, if expenses increase for a given timeframe, data included in different GL accounts could help explain how this spike in expenses affects revenue or accounts payables. This ability to dig deeper into specific transactions helps companies locate the source of the issue, allowing decision makers to react accordingly. Accuracy for all data in a GL is imperative so that the reports, analysis, and financial statements display credible information.

One of the most important outcomes of a GL is the creation of financial statements. However, the three most important aspects of the GL are the balance sheet, income statement, and cash flow statement. 

Accounting teams need these reports to better understand what their current assets and liabilities are, as well as how much cash they have (or don’t have) and where that cash is going or coming from. Investors, analysts, management, and other stakeholders are also interested in these financial statements to stay informed of a company's performance and financial standing on an ongoing basis.

G2’s senior financial analyst, Felipe Torres, further explains why GLs are so important for companies:

“In the finance and accounting department, GL is the root of everything we do. Within the GL, we maintain every detail of our company’s financials, along with metadata on the time of transactions, the vendors or customers, the departments, and the amounts. To that end, the GL is the backbone of not only our financial statements but also our FP&A (financial planning & analysis) capabilities, allowing us to analyze company trends and activity, to inform our decisions about the future.”

Accounting software makes GL easily accessible

Before the internet and the advancement in accounting technology, accounting and accounting transactions were recorded by hand and written on paper in various journals. These journal entries were then organized, summarized, totaled, and copied to the GL. You can imagine, not only how tedious this was, but how easily human errors could be made. To this day, the idea of GLs is similar but more streamlined, organized, and easier to track, thanks to some basic features of accounting software. 

Current accounting software, among its other features, can help accounting teams maintain journal entries by automatically calculating debits and credits and ensuring all entries meet specific guidelines. Additionally, accounting software houses crucial financial information in one database, which makes the reconciliation process more streamlined and efficient, because the data is easily accessible, organized, and valid.

An accurate, easily accessible GL allows companies of any size, with any budget (there are several free accounting platforms available) to better plan inventory, pricing, ensure the books are balanced, catch fraudulent activities, and have a legitimate paper trail in case of an audit. And maintaining a GL is not just important to for-profit organizations. Nonprofits must track their grants, donations, gifts, or members' contributions to remain financially transparent to their donors, as well as comply with grant and tax regulations.

Of the hundreds of accounting software reviews G2 has collected over the past 12 months, the importance of a GL has been mentioned several times, and within those reviews, users have highlighted repeatedly the GL feature that is important to them; simplicity. 

A software engineer at a small business recently wrote about AlignBooks, “General ledger creation is simple and detailed”, while an accounting officer using Sage50 Cloud Accounting said, “the creation of general ledgers is relatively simple and also its very detailed and one can be able to create as many as possible charts of accounts.”

Accounting software has come a long way since GLs were tracked via pen and paper and spreadsheets. Thus, finding the right solution can help simplify the recording of all financial transactions and paint a bigger picture of a company.