General Ledger Accounts: What They Are and How to Set Them Up

The five types of accounts

Every account is an asset, liability, equity, revenue or expense account.

• Assets: cash, receivables, inventory, equipment.
• Liabilities: payables, credit cards, loans, taxes owed.
• Equity: owner's capital, draws, retained earnings.
• Revenue: sales and other income.
• Expenses: rent, payroll, supplies, marketing, interest.

The first three appear on the balance sheet, and the last two on the income statement. See assets, liabilities and equity.

A common numbering system

Many charts number accounts by type: 1000s for assets, 2000s liabilities, 3000s equity, 4000s revenue and 5000s-6000s expenses.

Numbers keep the list in a predictable order and leave room to add accounts later.

How to set up your chart of accounts

Start with a template for your industry, remove what you will not use, and add accounts only when you need a separate report line.

1. Pick a starter chart from your accounting software.
2. List your real bank, card and loan accounts.
3. Add revenue accounts for each major income stream.
4. Keep expenses to a manageable set. See business expense categories.
5. Add equity accounts for owner contributions and draws.
6. Review with your accountant before you start posting.

How the ledger works

Each transaction is recorded as a journal entry and posted to the accounts it affects. The ledger shows every account's activity and balance.

When you pay $800 rent, the ledger shows a debit to rent expense and a credit to cash. The balance of every account at period end feeds your financial statements. Learn the mechanics in debits vs. credits and see sample postings in general ledger examples.

Tips for keeping the ledger clean

Avoid duplicate or vague accounts, never use a catch-all account for long, and review the ledger monthly.

• One purpose per account. Avoid 'Miscellaneous' beyond a few dollars.
• Do not rename an account to mean something different. Create a new one.
• Use sub-accounts if you need detail, such as marketing split by channel.
• Reconcile cash accounts monthly. See bank reconciliation.
• Delete or archive unused accounts only when they have no balance.

Tracking loans and financing in the ledger

Record loan proceeds as a liability, principal payments as a reduction of that liability, and interest and fees as expenses.

A separate liability account for each financing product keeps balances clear. Track interest and fees in their own expense accounts so you can see the true cost of borrowing. Illustrative example: if you repay $1,100 on a loan with $1,000 of principal and $100 of cost, the $100 is the expense.

Mistakes to avoid when building your chart

Too many accounts, accounts that overlap and accounts named after vendors make reports hard to read.

Do not create a separate expense account for every vendor. Use categories and let the vendor name sit on the transaction. Avoid two accounts for the same thing, such as 'Office supplies' and 'Supplies - office.' Keep owner draws and personal items out of expense accounts.

If you work with an accountant, ask which accounts they need for tax mapping. A short conversation at setup avoids a long clean-up at year-end.

A tidy ledger helps when you need capital

Well-organized accounts make it easy to show revenue trends and calculate payback on a funded project.

ROI Funder works from payback math and a complete file of an application plus 3 months of business bank statements. We consider 500+ FICO, 6+ months in business and $20,000+ monthly revenue. If your ledger shows seasonal dips, explore a business line of credit.