A general ledger is the master record of every financial transaction your business makes, organized by account. Setting one up involves creating a chart of accounts, recording transactions as debits and credits, posting those entries to the correct accounts, and periodically verifying that everything balances. Whether you do this by hand in a spreadsheet or use accounting software, the underlying process is the same.
Set Up Your Chart of Accounts
Before you can record anything, you need a chart of accounts. This is the organizational backbone of your general ledger: a numbered list of every category where money can flow in or out. Every account falls into one of five types:
- Assets — what your business owns (cash, equipment, inventory, accounts receivable)
- Liabilities — what your business owes (loans, credit card balances, accounts payable)
- Equity — the owner’s stake in the business (owner contributions, retained earnings)
- Revenue — money earned from sales or services
- Expenses — costs of running the business (rent, payroll, supplies, utilities)
Each account gets a code number so you can find it quickly and keep entries consistent. A common approach is to assign number ranges by type: assets might be 1000–1999, liabilities 2000–2999, equity 3000–3999, revenue 4000–4999, and expenses 5000–5999. Within those ranges, you can create subcategories. For instance, 1010 might be your checking account, 1020 your savings account, and 1100 your accounts receivable. A freelancer might need 15 to 20 accounts. A retail business with inventory, payroll, and multiple revenue streams might need 50 or more.
Start with the accounts you actually use. You can always add new ones later, but a bloated chart of accounts makes bookkeeping harder, not easier. If you’re unsure what to include, look at the categories on your bank and credit card statements for the past few months. Those spending patterns will tell you which expense accounts you need.
Understand Debits and Credits
Every transaction in a general ledger is recorded as at least one debit and one credit. The total debits must always equal the total credits. This is double-entry bookkeeping, and it’s the reason a general ledger can catch errors: if debits and credits don’t match, something went wrong.
The rules are straightforward once you memorize the pattern. For asset and expense accounts, a debit increases the balance and a credit decreases it. For liability, equity, and revenue accounts, the opposite is true: a credit increases the balance, and a debit decreases it.
Here’s a concrete example. Say you pay $800 in rent by check. You’d debit your Rent Expense account (increasing the expense) by $800 and credit your Cash account (decreasing the asset) by $800. Both sides of the entry equal $800, so the books stay balanced. If a customer pays you $2,000 for services, you’d debit Cash by $2,000 (asset goes up) and credit Revenue by $2,000 (revenue goes up). Every transaction follows this pattern, no matter how complex.
Record Transactions in a Journal
Before anything hits the general ledger, it gets recorded in a journal, sometimes called the “book of original entry.” Each journal entry includes the date of the transaction, the accounts affected, the debit and credit amounts, and a brief description of what happened. Think of the journal as a chronological diary and the general ledger as the organized filing cabinet where those entries eventually land.
For each entry, list the debited account first, then the credited account indented beneath it. Include enough detail in the description that you (or someone else) could understand the transaction months later without digging through receipts. “Office Depot, printer paper and toner” is useful. “Supplies” is not.
Post Journal Entries to the Ledger
Posting means transferring each journal entry to the appropriate account in your general ledger. If you debited an account in the journal, you debit the same account in the ledger. If you credited it in the journal, you credit it in the ledger. The date you record in the ledger should be the date the transaction originally occurred, not the date you happen to be doing the posting.
You can post entries one at a time as they happen, at the end of each day, or in a batch at the end of the week or month. More frequent posting keeps your books current and makes errors easier to spot. Less frequent posting saves time but means your ledger is always slightly out of date. For most small businesses, posting weekly strikes a reasonable balance.
Each ledger account should show a running balance. After posting a new entry, recalculate the account balance immediately. For an asset account, add debits and subtract credits from the previous balance. For a liability or revenue account, add credits and subtract debits. This running total is what you’ll use when it’s time to check your work.
Run a Trial Balance
A trial balance is your error-checking tool. At the end of a period (monthly is standard, but weekly works too), list every account in your general ledger along with its ending balance. Then add up all the debit balances in one column and all the credit balances in another. If the two totals match, your ledger is in balance. If they don’t, there’s a mistake somewhere: a transposed number, a one-sided entry, or an amount posted to the wrong account.
When the totals don’t match, start by looking at the difference. If it’s divisible by 9, you likely transposed two digits (writing $540 instead of $450, for example). If the difference matches the exact amount of a specific transaction, check whether that entry was posted to only one account instead of two. These shortcuts can save hours of hunting.
A balanced trial balance doesn’t guarantee everything is perfect. If you accidentally posted an expense to the wrong expense account, debits and credits still match, but the individual account totals are wrong. That’s why periodic review of each account’s transactions matters, not just the grand totals.
Reconcile Against Outside Records
Balancing debits and credits internally is only half the job. You also need to compare your ledger balances to external records to make sure nothing was missed or recorded incorrectly. The most common reconciliation is matching your Cash account in the ledger to your bank statement. Go through each transaction on the bank statement and confirm it appears in your ledger. Flag anything that shows up in one place but not the other: bank fees you forgot to record, deposits that haven’t cleared, or checks that were written but not yet cashed.
For accounts receivable, compare your ledger to actual customer payments received. For accounts payable, check against vendor invoices and statements. The goal is to make sure your general ledger reflects reality. Reconciling monthly prevents small discrepancies from snowballing into larger problems that are much harder to untangle later.
Using Software to Automate the Process
If you’re using accounting software, the steps above still happen, but the software handles much of the mechanical work for you. When you enter an invoice or record a payment, the system automatically creates the journal entry and posts it to the correct ledger accounts. Bank feeds pull transactions directly from your financial institutions, and rule-based automation can categorize recurring transactions (like a monthly rent payment) without manual input each time.
Some platforms use AI-powered invoice capture, letting you upload or photograph a receipt and automatically draft a transaction for your review. Payments sync directly into the ledger and reconcile automatically against bank data. This dramatically reduces data entry time and the risk of misclassifying a transaction. Deployment options range from cloud-based systems you access through a browser to on-premises software installed on your own computers.
Even with automation, you should still review your general ledger regularly. Software eliminates arithmetic errors but can’t catch a transaction categorized under the wrong account or a vendor payment applied to the wrong invoice. A monthly review of your trial balance and account details keeps your records reliable.
How Long to Keep Your Records
The IRS requires you to keep records as long as they’re needed to prove the income or deductions on a tax return. For most business income and expense records, that means at least three years from the date you file the return. If you have employees, keep all employment tax records for at least four years. In practice, many accountants recommend keeping general ledger records for seven years to cover situations involving underreported income, where the IRS has a six-year window to audit.
Store digital backups of your ledger and supporting documents (receipts, invoices, bank statements) in a secure location separate from your primary system. If you’re using cloud-based accounting software, confirm that the provider maintains backups and that you can export your data in a standard format if you ever switch platforms.