What is a general ledger in simple terms?

How the pieces fit:

• Journal: the day-by-day list of transactions, for example "March 3, paid $780 rent."
• Ledger: the totals by account, for example "Rent expense for March: $780."
• Accounts: income, expenses, assets, liabilities and owner's equity (net worth).

Single entry vs double entry. Publication 583 describes a single-entry system as one built around the profit or loss statement, which many small businesses use. In a double-entry system every transaction is recorded twice, as a debit in one account and a credit in another, and total debits must equal total credits. The publication's example records a $780 rent payment as a debit to Rent expense and a credit to Cash.

At year end, income and expense accounts are closed out and start fresh, while asset, liability and net worth accounts carry over.

For a sole proprietor with simple finances, a well-kept income and expense ledger is often enough day to day. Accounting software or an accountant typically keeps a full double-entry general ledger when the business has loans, inventory, employees or several owners.