The General Ledger

As a bookkeeper, you may be dreaming of having one source that you can turn to when you need to review all entries that affect your business’s accounts. (Okay, so maybe that’s not exactly what you’re dreaming about.) The General Ledger is your dream come true. It’s where you find a summary of transactions and a record of the accounts that those transactions affect.

In this article, you discover the purpose of the General Ledger. It tells you not only how to develop entries for the ledger but also how to enter (or post) them. In addition, it explains how to change already-posted information or correct entries in the ledger and how this entire process is streamlined when you use a computerized accounting system.

Uses of The General Ledger

The General Ledger serves as the figurative eyes and ears of bookkeepers and accountants who want to know what financial transactions have taken place historically in a business. By reading the General Ledger — not exactly interesting reading unless you just love numbers — you can see, account by account, every transaction that has taken place in the business. (And to uncover more details about those transactions, you can turn to your business’s journals, where transactions are kept on a daily basis. 

The General Ledger is the granddaddy of your business. You can find all the transactions that ever occurred in the history of the business in the General Ledger account. It’s the one place you need to go to find transactions that affect Cash, Inventory, Accounts Receivable, Accounts Payable, and all other accounts included in your business’s Chart of Accounts. 

The General Ledger is the granddaddy of your business. You can find all the transactions that ever occurred in the history of the business in the General Ledger account. It’s the one place you need to go to find transactions that affect Cash, Inventory, Accounts Receivable, Accounts Payable, and all other accounts included in your business’s Chart of Accounts.

Developing Entries for the Ledger

Because your business’s transactions are first entered in journals, you develop many of the entries for the General Ledger based on information pulled from the appropriate journal. Cash receipts and the accounts that are affected by those receipts, for example, are listed in the Cash Receipts journal.

Cash disbursements and the accounts affected by those disbursements are listed in the Cash Disbursements journal. The same is true for transactions in the Sales journal, Purchases journal, General journal, and any other special journals you may be using in your business.

At the end of each month, you summarize each journal by adding the columns, and then you use that summary to develop an entry for the General Ledger, which takes a lot less time than entering every transaction in the General Ledger.

Note that the debits and credits are in balance — $2,900 each. All entries to the General Ledger must be balanced entries. That’s the cardinal rule of double-entry bookkeeping. 

In this entry, the Cash account is increased by $2,900 to show that cash was received. The Accounts Receivable account is decreased by $500 to show that customers paid their bills and the money is no longer due. The Sales account is increased by $900 because additional revenue was collected. The Capital account is increased by $1,500 because the owner put more cash into the business.

This General Ledger summary balances out at $2,050 each for debits and credits. The Cash account is decreased to show the cash outlay; the Rent and Salaries accounts are increased to show the additional expenses, and the Accounts Payable and Credit Cards Payable accounts are decreased to show that bills were paid and are no longer due.

Note that this entry is balanced. The Accounts Receivable account is increased to show that customers owe the business money because they bought items on store credit. The Sales account is increased to show that even though no cash changed hands. Cash will be collected when the customers pay their bills.

Like the entry for the Sales account, this entry is balanced. The Accounts Payable account is increased to show that money is due to vendors, and the Purchases expense account is also increased to show that more supplies were purchased.

Debits and credits both total $10,260.

In this entry, the Sales Return and Purchase Return accounts are increased to show additional returns. The Accounts Payable and Accounts Receivable accounts are both decreased to show that money is no longer owed. The Vehicles account is increased to show new company assets, and the Capital account, which is where the owner’s deposits into the business are tracked, is increased accordingly.

Posting Entries to the Ledger

After you summarize your journals and develop all the entries you need for the General Ledger, you post your entries in the General Ledger accounts.

When posting to the General Ledger, include transaction dollar amounts as well as references to where the material was originally entered into the books so you can track a transaction if a question arises later. You may wonder what a number means, your boss or the owner may wonder why certain money was spent, or an auditor (an outside accountant who checks your work for accuracy) could raise a question.

Whatever the reason why someone is questioning an entry in the General Ledger, you definitely want to be able to find the point of original entry for every transaction in every account. Use the reference information that guides you to where the original detail about the transaction is located in the journals to answer any question that arises.

For this particular business, three of the accounts — Cash, Accounts Receivable, and Accounts Payable — are carried over month to month, so each has an opening balance. Just to keep things simple, this example starts each account with a $2,000 balance. One of the accounts, Sales, is closed at the end of each accounting period, so it starts with a zero balance.

Most businesses close their books at the end of each month and do financial reports; others close them at the end of a quarter or end of a year. For purposes of this example, it’s assumed that this business closes its books monthly. The figures that follow give examples for only the first five days of the month to keep things simple.

As you review the figures for the various accounts in this example, notice that the balance of some accounts increases when a debit is recorded and decreases when a credit is recorded. Others increase when a credit is recorded and decrease when a debit is recorded. That’s the mystery of debits, credits, and double-entry accounting.

The Cash account increases with debits and decreases with credits. Ideally, the Cash account always ends with a debit balance, which means that there’s still money in the account. A credit balance in the Cash account indicates that the business is overdrawn, and you know what that means: Checks are returned for nonpayment.

The Accounts Receivable account increases with debits and decreases with credits. Ideally, this account also has a debit balance that indicates the amount still due from customer purchases. If no money is due from customers, the account balance is zero. A zero balance isn’t necessarily a bad thing if all customers have paid their bills. But a zero balance may be a sign that your sales have slumped, which could be bad news.

The Accounts Payable account increases with credits and decreases with debits. Usually, this account has a credit balance because money is still due to vendors, contractors, and others. A zero balance here equals no outstanding bills.

These three accounts — Cash, Accounts Receivable, and Accounts Payable — are part of the balance sheet. Asset accounts on the balance sheet usually carry debit balances because they reflect assets (in this case, cash) owned by the business. Cash and Accounts Receivable are asset accounts.

Liability and Equity accounts usually carry credit balances because Liability accounts show claims made by creditors (in other words, money owed by the company to financial institutions, vendors, or others), and Equity accounts show claims made by owners (in other words, how much money the owners have put into the business). Accounts Payable is a Liability account.

Here’s how these accounts affect the balance of the company:

Assets = Liabilities + Equity
Cash (debit balance) = Accounts Payable (credit balance)
Accounts Receivable (usually debit balance)

The Sales account isn’t a balance-sheet account. Instead, it’s used to develop the income statement, which shows whether a company made money in the period being examined. 

Credits and debits are pretty straightforward when it comes to the Sales account: Credits increase the account, and debits decrease it. The Sales account usually carries a credit balance, which is a good thing because it means that the company had income.

What’s that, you say? The Sales account should carry a credit balance? That may sound strange, so let me explain the relationship between the Sales account and the balance sheet. The Sales account is one of the accounts that feeds the bottom line of the income statement, which shows whether your business made a profit or suffered a loss. A profit means that you earned more through sales than you paid out in costs or expenses. Expense and Cost accounts usually carry a debit balance.

The income statement’s bottom-line figure shows whether the company made a profit. If Sales-account credits exceed Expense and Cost-account debits, the company made a profit. That profit would be in the form of a credit, which gets added to the Equity account called Retained Earnings, which tracks how much of your company’s profits were reinvested in the company to grow it.

If the company lost money, and the bottom line of the income statement showed that costs and expenses exceeded sales, the number would be a debit. That debit would be subtracted from the balance in Retained Earnings to show the reduction in profits reinvested in the company.

If your company earns a profit at the end of the accounting period, the Retained Earnings account increases thanks to a credit from the Sales account. If you lose money, your Retained Earnings account decreases.

Because the Retained Earnings account is an Equity account, and Equity accounts usually carry credit balances, Retained Earnings usually carries a credit balance as well.

Adjusting for Ledger Errors

Your entries in the General Ledger aren’t cast in stone. If necessary, you can always change or correct an entry with what’s called an adjusting entry. Four of the most common reasons for General Ledger adjustments are

  • Depreciation: A business shows the aging of its assets through depreciation. Each year, a portion of the original cost of an asset is written off as an expense, and that change is noted as an adjusting entry. 
  • Prepaid expenses: Expenses that are paid up front, such as a year’s worth of insurance, are allocated by the month by using an adjusting entry. This type of adjusting entry is usually done as part of the closing process at the end of an accounting period. 
  • New accounts: You can add accounts by adjusting entries at any time during the year. If you’re creating the new account to track transactions separately that once appeared in another account, you must move all transactions that are already in the books to the new account. You make this transfer with an adjusting entry to reflect the change.
  • Deleted accounts: You should delete accounts only at the end of an accounting period. The next section, “Using Computerized Transactions,” shows you the type of entries you need to make in the General Ledger.

Using Computerized Transactions

If you keep your books by using a computerized accounting system, posting to the General Ledger is done behind the scenes by your accounting software. You can view your transactions right on the screen. This section shows you how to use two simple steps in QuickBooks Desktop Pro without ever having to make a General Ledger entry. 

Other computerized accounting programs let you view transactions on the screen, too. I used QuickBooks for the examples throughout the book because it’s the most popular system.

If you need to make an adjustment to a payment that appears in your computerized system, highlight the transaction, click Edit Transaction in the line below the account name, and make the necessary changes.

As you navigate the General Ledger created by your computerized bookkeeping system, you can see how easy it would be for someone to make changes that alter your financial transactions and possibly cause serious harm to your business. 

Someone could reduce or alter your bills to customers, for example, or change the amount due to a vendor. Be sure that you can trust whoever has access to your computerized system and that you’ve set up secure password access. Also establish a series of checks and balances for managing your business’s cash and accounts.

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