What is a general ledger, and how does double-entry bookkeeping work?

01Journal entries: two sides, equal totals#

A journal entry records one transaction: a date, a memo, and at least one debit and one credit. The debits are written in the left column and the credits in the right, and the two columns must total the same amount. An entry that does not balance cannot be posted.

Some illustrative examples. A customer pays an open invoice: debit Cash $5,000; credit Accounts receivable $5,000. You receive a bill for the month’s hosting: debit Hosting expense $8,000; credit Accounts payable $8,000. You pay it: debit Accounts payable $8,000; credit Cash $8,000. An investor wires a SAFE: debit Cash $500,000; credit SAFE liability $500,000. Each entry keeps assets equal to liabilities plus equity, which is why the balance sheet holds.

An entry can have more than two lines. A payroll run has one debit for wages and credits for net pay, each tax withheld and each benefit deduction. What matters is that the total of the debit column equals the total of the credit column.

02Normal balances#

Each type of account increases on one side, its normal balance, and decreases on the other:

A balance on the wrong side is a signal worth chasing. Accounts payable with a debit balance means a bill was paid twice or a payment was never matched to its bill. Cash with a credit balance means the books show an overdraft the bank may not.

• Assets: debit. Cash, receivables, prepaids, equipment.
• Expenses: debit. Payroll, software, rent, hosting.
• Liabilities: credit. Payables, accruals, deferred revenue, SAFEs, loans.
• Equity: credit. Common and preferred stock, paid-in capital, retained earnings.
• Revenue: credit. Subscriptions, services, interest income.
• Contra accounts run the other way: accumulated depreciation is a credit against an asset; refunds and discounts are debits against revenue.

03The ledger and its running balance#

The general ledger sorts every posted entry by account. Each account page lists, in date order, the date, the memo, the debit, the credit and the running balance after each line. The running balance is computed, never typed: the opening balance, plus debits less credits for a debit-normal account, or plus credits less debits for a credit-normal one.

Take an illustrative accounts receivable account with an opening balance of $18,500. An invoice for $6,400 is a debit and takes it to $24,900. A $3,200 payment is a credit and brings it to $21,700. A $450 credit memo is a credit and brings it to $21,250. At month end the balance should equal the total of open invoices on the aging report. If it does not, one of the lines above it is wrong, and the ledger tells you exactly which entries to check.

04The trial balance#

A trial balance lists every account with its closing balance in a debit column or a credit column, on one date. The two columns must total the same. It is the first report pulled at month end, and the source from which the balance sheet and income statement are built.

A balanced trial balance proves only that every posted entry balanced. It does not catch an expense posted to the wrong account, a transaction recorded twice on both sides, or one never recorded at all. Those are found by reconciling each balance to something outside the books: the bank statement, the payroll provider, the Stripe balance, the contract.

05Posted entries are reversed, never edited#

Once an entry is posted and the month is reported, it is part of the record. If it was wrong, you do not change it. You post a new entry that reverses it, the exact mirror with debits and credits swapped, and then post the correct one. Or, for a misclassification, you post a reclassification that moves the amount from the wrong account to the right one.

An illustrative case. In August a $1,200 software subscription was posted as rent, in a month already closed and sent to investors. In September, the open month, post: debit Software $1,200; credit Rent $1,200, with a memo naming the original entry. August still says what it said when it was reported. September carries the correction, with a date and an author. Under US GAAP, a material error in issued statements is corrected and disclosed under ASC 250 rather than overwritten; at a small company, most errors are immaterial and are fixed this way in the current period.

Editing in place is what makes books untrustworthy. A figure that was $40,000 in the board deck and is $38,800 in the ledger, with no entry to explain the difference, is the kind of thing diligence finds, and it costs more to explain than to have done right.

06Period locks#

A closed month is locked so nothing can be posted into it by accident. QuickBooks Online calls this a closing date; Xero calls it a lock date. Once the month is reviewed and reported, set the lock, and from then on every correction lands in the open period as a dated entry.

Locks also stop the quieter problem: a bank rule, an integration or a teammate re-categorizing a transaction in a prior month, which changes a number you already sent without anyone noticing. If a closed month needs reopening, someone should decide to do it, write down why, and lock it again.

07What to check in your own ledger#

Five checks that take minutes and catch most of what goes wrong:

• Every balance-sheet account ties to an outside source at month end.
• No account has a balance on the wrong side without a known reason.
• Manual journal entries carry a memo saying what and why, and someone other than the author reviewed them.
• Corrections to closed months are dated in the open month, not edits to the original.
• The closing date or lock date is set to the last reviewed month.