Netgain on: General ledger

The general ledger (GL) is the central record of a company's financial transactions. It holds every entry for income, expenses, assets, liabilities, and equity, and it's the source for every financial statement you prepare.

If the GL is wrong, the balance sheet and income statement are wrong too. Read on to learn how the general ledger works, how a general ledger adjustment keeps it accurate, and where automation takes manual work off your team's plate.

What is a general ledger?

The general ledger is an organized set of numbered accounts that records every financial transaction a company makes, including sales, expenses, assets, liabilities, and equity. Accountants use it to track activity and to produce financial reports.

The GL does two jobs. It shows where the company stands financially at any point in time, and it keeps a transaction-level trail behind every balance. When an auditor or your CFO asks where a number came from, the answer starts in the GL.

Each account in the GL holds one type of asset, liability, equity, revenue, or expense. As transactions occur, they post to the right account. When a balance needs correcting or updating, accountants post a general ledger adjustment, which is covered below.

Why are general ledger accounts used in businesses?

General ledger accounts keep every financial transaction in one place. That gives finance teams one source for three things:

• Financial statements: The balance sheet, income statement, and cash flow statement all pull from GL balances. Revenue, expenses, assets, and liabilities are calculated from the accounts in the GL.
• Accounting records: The GL keeps a detailed trail of every transaction, so teams can trace activity over time for internal decisions, tax compliance, audits, and reporting.
• Trial balance: The trial balance lists every GL account balance in debit and credit columns. Total debits should equal total credits, which gives you a first check on the accuracy of your entries. After each general ledger adjustment, an adjusted trial balance confirms that debits still equal credits.

How do you maintain and update a general ledger account?

Keeping GL accounts accurate comes down to four recurring steps:

1. Account setup: Define each asset, liability, equity, revenue, and expense account and give it a unique number. For NetSuite teams, Cross-Validation Rules adds a control at this step by blocking or flagging invalid account and segment combinations when a transaction is saved.
2. Transaction recording: Log every transaction to its account with the date, amount, and type.
3. Reconciliation: Compare account balances with bank statements and other support, and make ledger adjustments where they don't match. NetCash automates bank and credit card reconciliations inside NetSuite by matching bank activity to the GL.
4. Periodic reviews: Check balances on a set schedule so differences between the GL and your bank statements get fixed before they pile up.

What is a general ledger adjustment?

A general ledger adjustment is a journal entry that corrects or updates an account balance so the financial statements show what actually happened in the period. Most are posted at period end, and they fall into two groups: adjusting entries for accruals, deferrals, and estimates, and corrections for errors.

You may see "ledger adjustment" used in other ways. Some universities use it for a journal voucher that moves an amount already posted from one account to another, and some ERP systems use it for a tool that repairs corrupted ledger data. On this page, a ledger adjustment means the accounting entry that brings the general ledger up to date.

Most adjusting entries have two sides. One side is a balance sheet account, such as wages payable or deferred revenue. The other is an expense or revenue account, so a general ledger adjustment usually changes net income as well as the balance sheet.

Types of general ledger adjustments

Textbooks count the types differently. This page groups them into four:

• Accruals: Expenses or revenue that have been incurred or earned but not yet recorded, such as wages employees have earned but not been paid. NetClose tracks accruals inside NetSuite and books the journal entries for them at month end.
• Deferrals: Cash that moved before the expense or revenue belongs in the period, such as prepaid insurance or a customer prepayment recorded as deferred revenue. For prepaid expenses, NetClose builds amortization schedules and posts the entries for all of them in one run.
• Estimates: Amounts based on judgment rather than a transaction, such as depreciation, amortization, and the allowance for doubtful accounts. Netgain's cloud-based fixed asset accounting software calculates depreciation schedules, and NetAsset handles depreciation natively in NetSuite.
• Corrections: Entries that fix a wrong amount or account found after posting. Cross-Validation Rules cuts down on these by catching coding errors when the transaction is saved, instead of during the close.

Examples of an expense or revenue adjustment

The figures below are hypothetical. Each example pairs one expense or revenue account with a balance sheet account.

• Accrued wages (expense): Employees earned $4,000 by December 31, but payroll runs on January 3. Debit Wage Expense $4,000 and credit Wages Payable $4,000.
• Deferred revenue (revenue): A customer paid $12,000 on October 1 for 12 months of service, and the payment was recorded as Deferred Revenue. By December 31, three months are earned. Debit Deferred Revenue $3,000 and credit Service Revenue $3,000.

Here's what the two entries do to the affected accounts:

INSERT GRAPH HERE

Net income is $1,000 lower than in the unadjusted books, and total debits still equal total credits. An adjusted trial balance confirms that.

How do you post a general ledger adjustment?

1. Identify the accounts that need adjusting: Review the unadjusted trial balance for unrecorded accruals, deferrals, estimates, and errors.
2. Calculate the amount: Use source documents such as payroll records, contracts, and depreciation schedules.
3. Prepare and review the entry: Debit and credit the right accounts so the entry balances, add a description and supporting reference, and have a second person approve it. Netgain Approvals routes entries and other records through approval workflows in NetSuite.
4. Post the entry and check the result: Post it to the general ledger, then run an adjusted trial balance to confirm that total debits equal total credits. After posting, lock the period so no one adds late entries. NetClose locks the GL by subsidiary, transaction type, user, role, or segment, and users with the right permissions can still post top-side adjusting entries after a lock.

For a fuller walkthrough, read our guide to adjusting entries.

Examples of general ledger accounts

Every general ledger is built from five account types. Each one groups a different kind of transaction:

• Assets: Resources the business owns or controls, such as cash, accounts receivable, inventory, prepaid expenses, investments, and property, plant, and equipment.
• Liabilities: Amounts the business owes, such as accounts payable, notes payable, accrued expenses, and long-term debt. Under ASC 842, most leases also add a right-of-use asset and a lease liability. Netgain's cloud-based lease accounting software and NetLease for NetSuite calculate those balances and the entries behind them.
• Equity: What's left for owners after liabilities are subtracted from assets, such as common stock, retained earnings, and treasury stock.
• Revenue: Income earned from selling goods or services, such as sales revenue, service revenue, and interest income. Revenue accounts normally carry credit balances.
• Expenses: The costs of running the business, such as payroll, rent, utilities, and depreciation. Expense accounts normally carry debit balances. Any expense or revenue account can need a general ledger adjustment at period end, for example to record wages employees have earned but not yet been paid.

How do you set up a general ledger account?

Setting up the GL takes four steps:

1. Create a chart of accounts: List every account you'll use to track transactions, and give each one a unique name and number.
2. Enter beginning balances: Record each account's balance at the start of the accounting period.
3. Record transactions: Post every sale, purchase, payment, and receipt in date order.
4. Calculate ending balances: Total the activity in each account for the period and record the ending balance.

Each account has two sides: debits on the left and credits on the right. Assets and expenses normally carry debit balances. Liabilities, equity, and revenue normally carry credit balances.

How do you fill out your general ledger?

To fill out your general ledger, follow these steps:

1. Identify the accounts you need: Start with the accounts your transactions touch, such as cash, accounts receivable, and accounts payable.
2. Log transactions: Record each transaction with its date, amount, a short description, and the account number. If you split shared costs across subsidiaries, Shared Transactions automates those allocation entries in NetSuite.
3. Total the transactions: Add up the activity in each account and record the total in the right column.
4. Reconcile your ledger: Confirm that total debits equal total credits. If they don't, trace the difference back to the transaction and fix it with a general ledger adjustment.

What can a general ledger tell you?

A well-kept general ledger answers four questions finance leaders ask every month:

• What is each account's balance right now? The GL shows the current balance of every asset, liability, equity, revenue, and expense account.
• How are we tracking against budget? Comparing balances and transaction detail to targets shows where results are off plan and informs the next budget.
• What happened in prior periods? The GL is the historical record, so it supports period comparisons, trend analysis, and forecasting.
• Will the numbers hold up in an audit? A complete transaction trail makes audits and regulatory reviews faster to support.

For companies with more than one entity, each subsidiary's ledger also rolls up into consolidated statements. Netgain's cloud-based consolidations software brings those entity ledgers together.

What are the common mistakes in general ledger management?

Most GL problems trace back to a handful of habits:

• Skipping regular reconciliations: Errors go unnoticed and the differences compound month over month.
• Delaying GL updates: The GL should reflect current activity. Late entries leave decision-makers working from stale numbers.
• Overlooking transaction analysis: Without a regular review of transaction detail, unusual entries and coding errors slip through to the financial statements.
• Missing period-end adjustments: Failing to post a general ledger adjustment for accrued, deferred, or estimated items leaves an expense or revenue in the wrong period. That misstates net income and can hide problems until the books are closed. NetClose keeps accruals, amortizations, reconciliations, and close tasks together inside NetSuite, so period-end entries are tracked in one place.

General ledger adjustment: Frequently asked questions

What are the 5 adjustment entries?

The 5 adjustment entries most often listed are accrued revenue, accrued expenses, deferred (unearned) revenue, prepaid expenses, and depreciation. Some sources group them as accruals, deferrals, and estimates instead, so the count varies.

How do I post adjusting entries to the general ledger?

To post adjusting entries to the general ledger, identify the accounts that need adjusting, calculate each amount, prepare and review a balanced journal entry, and then post it and run an adjusted trial balance.

What are the four types of adjustments in accounting?

The four types of adjustments in accounting are accrued expenses, accrued revenue, prepaid expenses, and unearned revenue. Depreciation and error corrections are also common, which is why some lists name five or more. This page groups them as accruals, deferrals, estimates, and corrections.

How do you do a GL reconciliation?

To do a GL reconciliation, compare each general ledger balance with its supporting record, such as a bank statement or subledger. Investigate every difference, and post a ledger adjustment for any item that is an error or an unrecorded transaction. Then document the reconciliation and have it reviewed.